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ECONOMICS 



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ECONOMICS 



BY 



EDWARD THOMAS DEVINE, Ph.D. 

GENERAL SECRETARY OF THE CHARITY ORGANIZATION 

SOCIETY OF THE CITY OF NEW YORK 

SOMETIME FELLOW IN THE UNIVERSITY OF PENNSYLVANIA, AND 

STAFF LECTURER OF THE AMERICAN SOCIETY FOR THE 

EXTENSION OF UNIVERSITY TEACHING 



THE MACMILLAN COMPANY 

LONDON: MACMILLAN & CO., Ltd. 
1898 

J* ' *♦' All rights reserved 



.Ai<\cj 



1901.4 



Copyright, 1898, 
By the MACMILLAN COMPANY. 

GOrid.s litGtiVED* 



OF co^,v 




18^0 , 



Worfajcoft Press 

J. S. Cushing & Co. - Berwick & Smith 
Norwood Mass. U.S.A. 



PREFACE 

Several chapters of this book were origi- 
nally printed as lessons on Economics in Uni- 
versity Extensioiiy a magazine published in the 
interests of the movement for the Extension of 
University Teaching.J Those chapters, in a 
somewhat expanded form, were submitted as a 
thesis to the University of Pennsylvania in 
1893. Other portions have appeared as Uni- 
versity Extension courses at the Oxford (Eng- 
land) Summer Meeting and in various centres 
of the American Society. 

The presentation of the entire subject, while 
influenced in great measure by such contact 
with students who approach the subject from 
active life, is intended also for the class room of 
the college and high school. The inspiration 
which, in common with scores of the younger 
generation of economic students, the author has 

V 



VI PREFACE 

received from " that prince of teachers," Simon 
N. Patten, Professor of Political Economy in 
the University of Pennsylvania, will be suf- 
ficiently obvious to any reader of the current 
literature of the subject. 

New York, 1898. 



CONTENTS 



CHAPTER 

I. The Economic Man 
II. The Economic Environment . 

III. The Social Conditions of an Economic 

Society 

IV. The Making of Goods . 
V. The Consumption of Goods . 



VI. Propositions concerning Consumption 93 



.VII. Social Prosperity . 
VIII. The Standard of Living 



y< IX. Value 



X. The Distribution of Products 

XI. Money 

XII. The Organization of Credit . . 239 

XIII. The Organization of Industry . . 261 

XIV. Propositions concerning Industry . 300 
XV. Restatement of Familiar Principles . 323 

XVI. Obstacles to Social Progress . . 356 

XVII. Disposition of the Social Surplus . 37s 
vii 



16 

45 
60 

73 



112 
143 
154 
178 
211 



ECONOMICS 

CHAPTER I 

THE ECONOMIC MAN 

Economics is the science of man in his rela- 
tion to wealth. By wealth is meant, not as in 
common speech, a large quantity of desirable 
goods, but rather all desirable things in quan- 
tity great or small. The unit in economic ob- 
servations and reasonings is man as a member 
of a wealth-producing and wealth-using com- 
munity. The terms used in the study imply 
human needs, relations, and activities. The man 
who is of interest to the economist has need of 
goods, some of which are given free by nature, 
some like natural fruits, given free by the com- 
munity in which he lives, some like the farmer's 
grain, produced by his own efforts, and some 
like the food on the mechanic's table, given by 
the community in return for the product of his 

B I 



2 ECONOMICS 

labor. The economic man has the capacity for 
performing useful service of some sort, and for 
uniting with his fellow-beings on some sensible 
basis for mutual exchange of services. A pre- 
liminary description of the economic man is 
necessary : for a mastery of this single expres- 
sion is to the economist what an intelligent 
appreciation of the character of the cell is to 
the biologist, or an understanding of the school 
of the soldier to the student of military tactics. 

The economic man, then, is a human being. 
The term is generic, including both men and 
women ; not merely those who are usually called 
breadwinners, but also the bread preparers. 
Men and women may do different work, their 
place in the economic world may be distinct,^ 
but both are included in the term by which we 
designate the unit with which our study deals. 

The economic man, secondly, has material 
and spiritual wants which are satisfied by means 
of goods. The quantity and character of goods 
desired may vary widely at different times and 

^ See Economic Function of Womaji^ by the present author, 
Publications of the American Academy of Political and Social 
Science. 



THE ECONOMIC MAN 3 

places, furnishing an indication in each case of 
the particular kind of economic man then and 
there to be found. Some wants, however, are 
universal. Of these, food is first in importance, 
and has sometimes been taken by a figure of 
speech as a collective expression for all the 
goods required to supply man's wants. This is 
done, for example, by the economists who trace 
a connection between the wages paid to labor- 
ers and the cost of food. Strictly speaking, the 
relation is between wages and the cost of living. 
Next in im.portance are shelter and clothing, 
though in point of time ornaments are perhaps 
desired at an even earlier stage. Human asso- 
ciation and religious worship are among the 
most primitive goods, and these desires remain 
of chief importance in every stage of civiliza- 
tion with which we are familiar. Besides these 
fundamental wants there are innumerable spe- 
cial desires and a class of goods to correspond 
to each, however fantastic or however common. 
Man as the object of economic inquiries, hav- 
ing human desires, has also human capacities. 
Infants, idiots, idlers, invalids, and criminals are 
excluded more or less completely in accordance 



4 ECONOMICS 

with the degree of their incapacity. Those who 
are entirely dependent, and those whose natures 
are so perverted that society cannot afford to 
give them an opportunity for the free exercise 
of their powers, are not to be regarded, for 
purposes of economic study, as integers in hu- 
man society. Their presence raises many inter- 
esting economic questions, but they are not 
themselves economic men. It is obvious that 
different economists may have different views of 
the exact place where the line separating eco- 
nomic men from dependents should be drawn, 
and that some writers may not take the trouble 
to think out the distinction carefully, leaving 
even themselves in uncertainty whether, for ex- 
ample, persons supported in part by their 
own efforts and in part by charity ^ are or are 
not included in the observations which they 
make. Probably it would be most satisfactory 
to draw the line sharply between the economic 
man and the social debtor, including in the first 
class only those whose withdrawal would be felt 
to be a real economic loss to the communit}^, 

1 In England at one time nearly all common laborers received 
public relief at some period of their lives. 



THE ECONOMIC MAN 5 

and in the second class all who live upon others. 
Immense consequences flow from this distinc- 
tion. It has been recognized tacitly by many of 
the writers on economic subjects. Careless crit- 
ics, failing to discover that the economists were 
thinking only of the real members of economic 
society and not of the social debtors, have de- 
clared that their principles were false, because 
they did not apply to this or that special class, 
when in all probability the principles should have 
been applied only to the free and effective 
workers, the intelligent users of wealth, to the 
economic man whose desires and capacities 
are normal. 

We may find a useful comparison in civic re- 
lations. The citizen is one who is a member in 
full standing of the political community, who 
may claim the usual rights, and expects to per- 
form the ordinary duties of citizenship. Nearly 
all nations have tolerated the presence of other 
persons who share in the protection of the 
government, who are required to obey its laws, 
and who may have certain civil rights which 
may be taken away, however, or modified with- 
out their consent. 



6 ECONOMICS 

The distinction between the economic man 
and the social debtor is somewhat similar. The 
great body of the active workers throughout the 
world, whether day-laborers, skilled mechanics, 
merchants, or brain-workers, constitute a solid 
industrial community, each part connected by 
numerous bonds with every other part, each 
member contributing something that will satisfy 
the wants of himself or of others, and each aid- 
ing to some extent to determine what kind of 
goods he himself and others who are at work 
shall produce. Excluded from this body by 
their failure to make any such contribution are 
the social debtors — the idlers, the inefficient, 
the industrial failures. Their failure may be 
due to natural weakness, or to misfortune, or to 
a criminal unwillingness to take part in honest 
toil. There is no law or constitutional provision 
excluding them as a class from the industrial 
world, and nearly all who are able to work at all 
are at times persuaded or compelled to do so. 
But their work is irregular and of little value, 
and in large part they rely upon the bounty of 
others who are united to them by social or reli- 
gious ties, or upon the care given by the state. 



THE ECONOMIC MAN 7 

When they are employed, they are apt to receive 
from motives of pity or for other reasons more 
than they really earn, thus concealing the ex- 
tent to which they are supported by the active 
workers. 

It must not be thought that all social debtors 
are blameworthy. Those who are at one time 
dependent may have done useful work at some 
previous time. Many who appear to be com- 
pletely disabled are nevertheless producers be- 
cause they influence and stimulate the efforts of 
others. Young children might be thought 
equally useless with those whom we have called 
social debtors, but excepting those who are to 
remain useless all their lives it is better to 
regard them as workers in preparation. Our 
attention is directed toward their development 
into healthy, well-balanced, useful members of 
the community, and it is expected that they 
will gradually fit into their natural places of 
economic activity, first in their own homes, and 
then in some chosen occupation for which they 
will have been prepared. 

Perhaps at some time in the future we shall 
come to think of all social debtors, except those 



8 • ECONOMICS 

who are disabled, in much the same way as un- 
developed, untrained members of society, who 
can be transformed into active members by some 
suitable course of instruction and discipline. 
Farm colonies for tramps, indeterminate sen- 
tence in prisons, military and naval service, 
maintained in some countries on a large scale 
partly for its educational value, and the many 
attempts to restore individual families to self- 
support by means of the personal influence of 
friendly visitors, all rest upon this idea. Such 
agencies as these counteract to some extent the 
downward tendencies caused by " hard times," 
overwork, unhealthful sanitary conditions, in- 
temperance and immorality, which every year 
in every country leave by the wayside thou- 
sands who have had the capacity for work. 

Without attempting, therefore, to fix the 
moral responsibility for the difference between 
those whom we call economic men and the so- 
cial debtors, or to find out at present why there 
are so many in the latter class, it is sufficient to 
point out the distinction and to warn the student 
that nearly all economic discussion refers to the 
first class, which is fortunately, also, by far the 
most numerous. 



THE ECONOMIC MAN 9 

The laws of value, of wages, of profits, of in- 
terest, of rent, of money, of credit, of consump- 
tion, of social progress, are laws operating in a 
society of equals.^ The unit of all calculations 
is the economic man with clearly defined wants, 
with personal capacity for some kind of useful 
work, with the power of choosing between higher 
and lower pleasures, between the satisfaction 
enjoyed to-day and that insured for a future pe- 
riod, and with a social nature enabling him to 
work in some degree of harmony with other 
men. It must be admitted that every true eco- 
nomic principle would remain true when applied 
to a single man in the midst of a desert, or to a 
society of dependents all living, without any 
effort or responsibility of their own, on the 
direct bounty of some outside power. But the 
principles would then be applied very differ- 
ently. Their relative importance would be al- 
tered ; and the practical conclusions to be drawn 
from, them might be completely reversed. Thus 
in a society composed entirely of dependents the 
desire for food and for shelter might remain 

1 This word is of course used in a relative sense. Economic 
men are equals in that all earn their living. 



lO ECONOMICS 

among men as at present, but if the outside 
power gave shelter freely and food sparingly, 
the relative value of these two classes of goods 
would be influenced by this fact just as at pres- 
ent it is influenced by the relative cost of secur- 
ing them.^ 

No student of economics could entirely for- 
get, even if he desired to do so, the social 
conditions in the midst of which he finds the 
economic laws to be in operation. It is natural 
to keep those actual conditions constantly in 
view, whether practical conclusions are drawn 
and practical applications made or not. Eco- 
nomic men constitute society. On the outer 
fringe of the society to be studied is the social 
dependent. He cannot be ignored. He is not 
to be explained by exactly the same principles as 
apply to society in general. The social debtor 
may be cast aside to perish, or tolerated as a 
persistent drain on the social income. Neither 
course is wise, though human society is con- 
stantly alternating between them. 

Leaving aside this problem of practical philan- 
thropy, we return to our society of economic 

1 See p. 85, Chapter V. 



THE ECONOMIC MAN II 

equals to consider what mental traits may be 
discovered which are as universal as the physi- 
cal characteristics already pointed out. Fore- 
most among these is the feeling of personal 
independence, of confidence in the ability to earn 
one's living, a sense of security on the part of 
the individual in the continued public apprecia- 
tion of the services which he can render. Where 
this confidence is lacking, the man is not con- 
scious of full economic freedom. Where it is 
robust and universally shared, the economic 
ideal is realized. The possession of property no 
doubt strengthens this sense of security, but its 
real basis is personal, and it is to a large extent 
independent of any present possessions other 
than physical health, mental vigor, and a free 
opportunity to use one's powers to the best 
advantage. 

Coupled with this feeling of personal indepen- 
dence there is, in the normal economic man, an 
unwillingness to take for personal use any 
wealth which he has not earned. He would not 
steal even if the laws did not prohibit it. He will 
refuse to accept presents except as courtesies 
which will in some way be reciprocated. He 



12 ECONOMICS 

will accept the highest possible reward for his 
own labor, because that is the law of his society, 
and he willingly sees others exact similar terms 
of exchange ; but if he were to find himself in 
position to pocket the wealth belonging to others, 
he would reject the opportunity, insisting upon 
such social " rearrangements as would restore 
the wealth to its rightful owners. If the facts 
of actual life appear to be in conflict with this 
broad principle, it is partly because individuals 
are sometimes brought into possession of prop- 
erty as the result of complicated legal and so- 
cial relations which they do not fully understand, 
so that they do not appreciate to what extent 
they have really become dependents, or social 
debtors, and remain under the delusion that 
they have in some way earned and are entitled 
to all that they have ; and partly because there 
are many persons who having such opportuni- 
ties eagerly seize them from what is at bottom 
a criminal instinct. They thus belong in the 
criminal class of social debtors. The laws even 
of civilized countries are imperfect, and do not 
reach all v/ilf ul offenders ; but they are steadily 
improving, and in no direction at the present 



THE ECONOMIC MAN 1 3 

time more rapidly than in their extension to the 
class who, having large income, attempt to es- 
cape a just accounting for its origin. The rea- 
son for this improvement is not a class feeling 
of envy or resentment, but the fact that the 
great body of citizens, rich and poor, deliber- 
ately act upon principles of equity, and sternly 
insist that those who refuse to recognize those 
principles shall be put where they belong, be- 
yond the pale of honest citizenship. 

Another mental trait of the economic man is 
his readiness to accept the final judgment of the 
community as to the market value of the com- 
modities and services which he wishes to buy or 
sell. He may use great ingenuity and skill in 
the attempt to make that judgment more favor- 
able to himself and to those whose interests are 
identical with his own, but he accepts it never- 
theless as the basis of his economic relations 
with his fellows. The line between the eco- 
nomic man and the social debtor is nowhere 
more clearly drawn than here. The latter may 
be given an income determined by his human 
needs, or by the public safety, or by the gener- 
osity of those who deal with him, or by the 



14 ECONOMICS 

amount of the free surplus at the disposal of 
society. Any of these methods of distribution 
involves inquiry into the personal affairs of the 
recipients, such as would be resented by the 
normal economic man. Such inquiry would be 
humiliating to one who is not in need of assist- 
ance. It may or may not be humiliating to a 
dependent according as the dependency is, or is 
not, caused by his own fault. 

Economic society might conceivably adopt 
some other basis of wealth distribution such as 
that proposed by the socialists or the commun- 
ists. But present opinion in all countries, and, 
as far as all history shows, the practically uni- 
versal opinion of the past, has been in favor 
of a general market value for each class of 
goods, nicely adjusted to the total quantity of 
such goods available, and to the demand or 
general desire for them. Attention will be given 
in due time to the exact nature and laws of 
value. At present it is only necessary to point 
out the universal acquiescence in the fact of 
value as a characteristic of that part of the 
human family with which we are directly con- 
cerned. Those who struggle for higher wages, 



THE ECONOMIC MAN 1 5 

no less than others who attempt to sell land or 
diamonds at the highest possible price ; advo- 
cates of a single gold standard, no less than 
bimetalists who would like to see the price of 
silver increased ; scholars who prize books and 
instruments of research, and an opportunity for 
travel, and free time for meditation and study ; 
parents who weigh carefully the cost of pro- 
posed courses of education for their children ; 
every one who has any kind of unsatisfied desire 
takes value into consideration. 

The economic man has many other character- 
istics less easily described, but these are funda- 
mental, are easily recognized, and will remain as 
a part of our conception, however extensive may 
become our acquaintance with his less obvious 
traits. It has already become obvious that the 
economic man is not a mere abstraction and 
that he is not a rare exception. He is not only 
a human being. He is the normal human being 
of ordinary life. To an increasing extent we 
are all becoming economic men. 



CHAPTER II 

THE ECONOMIC ENVIRONMENT 

Like geography and some other sciences, 
economics requires a knowledge of man's sur- 
roundings. Those surroundings are partly- 
physical and partly social. What economics 
demands of physical science is a knowledge 
of the particular facts concerning the surface 
of the earth and the atmosphere which have 
any direct bearing upon man's welfare. If it 
were our task to account for those facts, it would 
be necessary to bring into our study all the 
teachings of astronomy concerning the past and 
present of the solar system, all the teachings of 
geology concerning the formation of the crust 
of the earth, and the teachings of biology con- 
cerning the natural history of plants and ani- 
mals. If, on the other hand, we were to 
attempt an examination of all those branches 
of human knowledge which indirectly contrib- 
ute to the welfare of man by furnishing to 
i6 



THE ECONOMIC ENVIRONMENT 1/ 

mechanic, farmer, or physician, the necessary- 
equipment of his calling, we should speedily 
get beyond the proper boundaries of any sin- 
gle science. Our inquiry is much less exten- 
sive and may be stated in this way : Of what 
general conditions must account be taken in 
man's struggle with nature for a living ? Or, 
in other words, what are the facts which de- 
termine the character of his economic life ? 

It is evident that we cannot borrow indis- 
criminately from geography, geology, or other 
sciences. There are innumerable facts which 
are essential to a well-ordered description of 
the earth's surface which are not essential in 
a statement of man's economic surroundings, 
because they have a very remote bearing, if 
any, upon the welfare of society. Such, for 
example, are the descriptions of many of the 
natural wonders of the Arctic regions and of 
the luxuriant vegetation of tropical swamps. 
The increase of knowledge or a shifting of 
conditions, such as the discovery of gold in the 
Klondike, or the transfer of tropical islands 
to a more efficient government, occasionally 
increases the relative importance of such facts, 
c 



l8 ECONOMICS 

giving them a new significance. By such means 
the environment, to adopt a more appropriate 
term for all these surroundings which have an in- 
fluence upon man's welfare, is continually chang- 
ing, certain conditions which were once of conse- 
quence ceasing to be so, and others rising to a 
prominent place. But the environment, as we 
shall use the term, never includes more than a 
comparatively small fragment of the universe, or, 
for that matter, more than a small portion of the 
facts and relations to be found on our own globe. 
In searching for those conditions of physi- 
cal nature which are the primary requisites of 
human activity, we encounter, first, what seems 
to be fundamental and universal, the existence 
of physical energy. The forces of nature are 
to a large extent placed under man's will. If 
this were not the case, man would not be able 
to exert any influence over his own well-being, 
and there would be no occasion for the study 
of economic laws. This physical energy ap- 
pears in various forms, as heat, light, magnet- 
ism, gravitation, and muscular force. In any 
of its forms it is convertible into others. In 
this process, if intelligently directed, it trans- 



THE ECONOMIC ENVIRONMENT 1 9 

forms useless matter into useful goods, and thus 
contributes to the end of all economic ac- 
tivity. 

Physical energy is often totally misdirected 
with the effect that goods which might have 
been of use to men are destroyed, i.e., given 
a form which renders them unfit for the use 
to which they would have been put. Perhaps 
it is never so directed as to be fully utilized. 
All human progress may be looked upon as 
an increase in the economy of physical energy. 
The new machine which utilizes a larger pro- 
portion of the force released by the burning 
of coal or the falling of water thus becomes 
a type of the progress of society. 

The student of physics learns that whether 
man succeeds or fails in his attempt to utilize 
a particular form of energy for his own pur- 
poses, the energy itself is not lost. The physi- 
cist measures it, in its earlier and later forms, 
and finds that none has been destroyed. But 
such measurements do not concern the econ- 
omist. The success or failure to utilize the 
energy in the particular form in which it was 
embodied is, from his standpoint, a final fail- 



20 ECONOMICS 

ure or success. If the coal in the engine does 
not drive the wheels successfully, it is of little 
consequence that the temperature of the sur- 
rounding air is slightly raised, and that gases 
are produced by the combustion. Infinite 
knowledge would be necessary for a complete 
utilization of the available natural forces. The 
amount of knowledge which we do possess is 
the slow product of experiment and research. 
Years may be spent upon the simplifying of 
processes of which we are already in posses- 
sion. Hence the saying among machinists that 
anybody can make a machine to do a given 
kind of work, but only a genius can make a 
simple machine that will do the work cheaply 
and well. 

A few of the forms in which physical energy 
appears are of sufficient importance to justify a 
fuller examination of their relation to human 
welfare. 

Heat may be regarded as the primary requi- 
site of plant and animal life. Not only is heat 
an absolute condition of such animal and vege- 
table life as we know, but it would seem to be 
essential that we receive almost precisely that 



THE ECONOMIC ENVIRONMENT 21 

amount of it which we do receive.^ A few de- 
grees in excess of highest summer heat would 
destroy vegetation over a large part of the earth, 
and a few degrees less than our winter tempera- 
ture would render a still larger part uninhabi- 
table. The sun's heat is used directly in count- 
less processes of agriculture and manufacture ; 
it is an element in the formation of winds and 
ocean currents ; and by raising water from the 
oceans in the form of vapor it permits the circu- 
lation through the continents. Stored up in 
beds of coal it becomes one of the most highly 
prized agents of industry, and again, in its more 
direct form, it is the source not only of that 
high degree of physical vigor which is essential 
to human enjoyment, but of life itself. 

Light, like heat, is indispensable, and as in 
the case of heat, the chief supply of our globe 
is from the sun. We may, perhaps, conceive a 
society existing without light, but its activity 
would be very different from our own. Almost 
the whole of our work presupposes sight on the 
part of those who direct and perform it. With- 
out light, dangers to life would be multiplied, 

1 Shaler, Interpretation of Nature ^ p. 66. 



22 ECONOMICS 

and countless sources of enjoyment would be 
destroyed. The dependence of human welfare 
upon the continued presence of a certain amount 
of energy in the form of light is therefore obvi- 
ous. But it would be difficult to obtain a full 
measure of its contribution to our economic life. 
Color is as important in industry as in art, and 
both art and industry fall within the field of 
economics in so far as they contribute to human 
welfare. A faint illustration of the extent to 
which light enters into the environment may be 
found in the economy of time and labor result- 
ing from the use of books and newspapers. 

Gravitation is a third form of energy which 
demands special attention. No force is more 
familiar in the mechanical processes of every- 
day life, and it is all-pervasive. We rely upon 
it for the weight of the hammer, for the flow of 
water, and for the stability of objects when 
placed in position. Gravitation holds ships and 
railway trains in their courses. It draws the 
ripened seed and the withered leaf to the 
ground, and causes the circulation of air and of 
water for which preparation has been made by 
the -action of heat. Because of its very familiar- 



THE ECONOMIC ENVIRONMENT 23 

ity it is easy to underestimate the important part 
which this silent force plays in the life of man. 

Among the various forms of physical energy, 
muscular force, and especially that exerted by 
human beings, has usually been assigned an 
unique place in economic texts. For certain 
branches of our discussion it will be of advan- 
tage to distinguish, in the total energy expended 
in any given industrial activity, that part which 
may be attributed to man's labor; but for our 
present purpose it will be simpler and entirely 
accurate to regard muscular force as one among 
many forms of energy, all of which, like muscu- 
lar force, even if not in the same degree, are 
under human direction. Muscular force may 
be regarded as the highest form of physical 
energy, for the reason that the relation between 
the directive will and the energy to be controlled 
is here most immediate. It is not necessary to 
invent intermediate mechanism or device, or 
even, in many of the muscular processes, to 
make conscious calculation of means and 
methods. Action follows will with incredible 
swiftness. The natural force which has been 
generated in muscular tissue is nevertheless a 



24 ECONOMICS 

product of other forces. It has a natural origin 
in the food by which man is nourished, the heat 
and light, and the biologic forces upon which 
his existence and health depend. 

The forces of nature, some examples of 
which have now been given, are capable of 
acting only upon matter. The transformation 
from one sort of energy to another takes place 
by the process of moving material objects. 
It is a commonplace of economics that man's 
part in industry is confined to the moving of 
things, but it is also in this manner that all 
physical forces act. Heat and gravitation cause 
the formation of clouds, the fall of rain, and 
the flow of rivers. It is everywhere the 
moving of solid, fluid, or vaporous matter. 
There is likewise no other manner in which 
directive intelligence may assert its will. By a 
series of motions, ores are mined, goods ex- 
changed, and nutritious food transformed into 
bodily tissue. These motions are largely within 
the scope of familiar observation. By a series 
of motions somewhat farther removed, moun- 
tain ranges were thrown up, glaciers carried 
across the face of the continents, soils made 



THE ECONOMIC ENVIRONMENT 2$ 

from disintegrating rocks, and animal and plant 
forms adapted to the various regions of the 
earth. 

Since the physical forces upon which man is 
to rely act only upon matter, it becomes neces- 
sary to consider the appearance of the mate- 
rial world in and upon which they are to act. 
Of the earth's interior little is known, and even 
that little we may omit. Undoubtedly the inte- 
rior is subject to the action of physical energy, 
and any radical changes in its condition might 
well be fatal to the existence of human society. 
Assuming its stability, however, we must re- 
gard all speculations concerning its condition as 
beyond our present field of study. We need 
consider only the earth's surface, including 
everything that is so near the surface as to be 
within reach of the miner and the dredger, and 
also including the atmosphere. The physical 
forces act uniformly wherever they are to be 
found throughout the world ; but those elements 
of the environment upon the examination of 
which we are now entering are variously 
arranged in different regions. It would be 
difficult to find any two spots on the earth in 



26 ECONOMICS 

which the environments are identical; and the 
primary differences are geographical. 

The natural home of man is upon the land. 
The entire expanse of land area is a little more 
than one-fourth of the earth's surface, or about 
one-half as great as that of the sea, if we leave 
out of account the frozen oceans of the polar 
regions. Of this land area, three-fourths is in 
the northern half of the globe, and grouped 
into two great land masses, known as the Old 
World and the New. The Old World, consist- 
ing of two distinct continents, of which Africa 
is one, and Europe and Asia the other, is more 
than twice as large as the New World of North 
and South America. Australia alone is entirely 
within the Southern Hemisphere. Asia is dis- 
tinguished for her lofty plateaus, Europe for 
her mountains and indented coast-line, America 
for her plains and river systems.^ The moun- 
tains of the Old World stretch from east to 
west; those of the New World, from north to 
south. The direction of the mountain ranges 
influences the direction of river courses, the 
distribution of moisture, the temperature, the 

iGuyot, The Earth and Man, Chapters VIII. and IX. 



THE ECONOMIC ENVIRONMENT- 2/ 

character of the soils and of the crops, the 
movements of population, and the growth of 
industry. It is, therefore, a consideration of 
great importance. Yet, on the whole, the posi- 
tion of mountain ranges is of less importance 
in the economic environment than the relative 
elevation of plains and plateaus, and the width of 
river basins. Thus it often happens that feat- 
ures of the landscape which to the naturalist or 
artist are most striking, are of less interest to 
the student of human welfare than others that 
are less obvious. Another simple illustration of 
the same truth may be cited here, although it 
anticipates features of the enviroment upon 
which we have not yet touched. Every text- 
book of physical geography dwells upon the 
difference between the trees of different regions. 
No traveller can avoid noticing such differences, 
and they really are of some economic signifi- 
cance. But they are of far less importance 
than differences in the grasses. All the cereals, 
or grains, are cultivated grasses, and both the 
vegetable and animal food of man are conse- 
quently determined in large part by their 
character. 



28 ECONOMICS 

Of almost equal importance with the ele- 
ments already noticed are climate, soil, mineral 
and vegetable products, and facilities for com- 
munication. A writer describes the provinces 
which border on the basin of the Mediterranean 
Sea as enjoying — in healthfulness and equa- 
bility of climate, in fertility of soil, in variety of 
vegetable and mineral products, and in natural 
facilities for the transportation and distribu- 
tion of exchangeable commodities — advantages 
which have not been possessed in any equal 
degree by any other territory of like extent in 
the Old World or the New.^ The Roman Em- 
pire, which encircled the Mediterranean and 
extended its sway far into three continents, 
thus rested upon the finest physical basis ever 
possessed by any single political power. If, 
then, we analyze the terms in which this supe- 
rior physical environment has been described, 
we shall be in possession of nearly all the re- 
maining features of the environment that need 
statement. 

By the climate is meant the character of 

1 George P. Marsh, The Earth as Modified by Human Action, 
p. I. 



THE ECONOMIC ENVIRONMENT 29 

the atmosphere as regards temperature and 
moisture. Chmate is affected by altitude, dis- 
tance from the equator, proximity to the sea, 
oceanic and atmospheric currents, the presence 
of great forests, and the situation with refer- 
ence to mountain ranges, plateaus, and plains. 
The equatorial regions are hot and moist. 
Islands and lands bordering upon the sea have 
a more equable climate, milder in winter and 
cooler in summer, than lands of equal latitude 
situated far inland. Since land absorbs and 
gives off heat more rapidly than water, there 
is an unequal heating of the air which causes 
an alternation of land and sea breezes daily, 
and a similar movement on a larger scale in 
consequence of the changes of seasons. ^ These 
larger currents are of great economic signifi- 
cance. They raise or lower the temperature 
according as they come direct from the sea 
or from continental areas. They bring with 
them moisture or drought. They have been 
known to carry fine particles of soil, as dust, 
in suf^cient quantities to alter materially the 
character of the soil upon which it is deposited. 

1 See any standard Physical Geography. 



30 ECONOMICS 

Clouds, whether brought by these currents 
of air or formed nearer at hand, modify the 
chmate by screening the earth from the direct 
rays of the sun, and by preventing rapid radia- 
tion of the heat when the direct rays are with- 
drawn. 

Ocean currents affect the climate of the 
regions near which they flow, causing, for 
example, the difference between the tempera- 
ture of France and that of Labrador in equal 
latitudes, and giving to the British Islands 
and Norway, to Japan and Alaska, a much 
warmer and moister climate than is ordinarily 
to be found in lands so far from the equator. 
The oceanic currents arise from the unequal 
heating of water, as those of the atmosphere 
arise from the unequal heating of air. Among 
the minor but still important regulators of 
climate is the presence of forests and other 
vegetation. A very great quantity of water 
is given to the air by the leaves of trees and 
grasses, and the moisture of the climate is 
thus increased,^ while the temperature is at 

1 Gaye, The Great World'' s Farm, Chapter IX. 



THE ECONOMIC ENVIRONMENT 31 

the same time lowered by the using up of 
the heat in the process of evaporation. 

The agencies that unite to produce climate 
are interwoven in such various ways that lines 
connecting places of equal temperature ^ are by 
no means parallel with the earth's equator. The 
extremes of temperature are crowded together 
much more closely in the Old World than in the 
New. In some parts of the Eastern Hemisphere 
differences are met with in a day's journey 
which are as great as those that the traveller 
would experience in going from Alaska to 
Mexico. In North America the general in- 
crease in elevation toward the south partly off- 
sets the effect of the more vertical rays of the 
sun in the equatorial zone, thus accounting for 
the slower increase in temperature. When we 
say of a particular place in the temperate zone 
that it has a fine climate, we mean that it has a 
fair proportion of days in which there is bright 
sunshine ; that its summer temperature is neither 
so high as to kill vegetation and to render the 
life of man insupportable, nor so low as to pre- 

1 These lines are called isotherms. They are shown upon 
the maps issued by the weather bureau. 



32 ECONOMICS 

vent the ripening of grains and fruit ; that there 
is a Hberal supply of moisture, sufficiently dis- 
tributed throughout the year to avoid the dan- 
gers of drought and flood ; that violent storms 
do not occur, or are infrequent; that there is 
sufficient moisture in the atmosphere in the 
form of clouds to serve as a screen from undue 
heat and cold, but not so much humidity as to 
increase the discomfort of summer ; and, finally, 
that the atmosphere is not contaminated by foul 
vapors and disease germs. 

Such a climate will be conducive to health 
and vigor, and if other conditions are equally 
favorable, it will give ample rewards for labor 
spent upon the cultivation of vegetable life. Its 
natural vegetation may be less luxuriant, but 
the conditions of economic life are on the whole 
more favorable than in the hotter and moister 
climate of a tropical zone. It is not at all es- 
sential that all of the conditions enumerated 
should be present in order to constitute a desir- 
able economic environment. Man may succeed 
in his struggle for a living even where the cli- 
mate is not equable, where the summers are in- 
tensely hot and the winters bitterly cold, where 



THE ECONOMIC ENVIRONMENT 33 

the winds bring little moisture and there are no 
rains for months in succession. This is only to 
say that climate is but one element in the ma- 
terial environment, and that we must consider 
also its other features. 

Among these none is of greater significance 
than the soil. In the present chapter it is the 
origin and composition of soils with which we 
are concerned. In a future chapter, on the 
making of goods, it will be pointed out that 
soils can be modified in character, and their use- 
ful qualities renewed as they are worn out. 
Soil consists mainly of clay, sand, and vegetable 
mould ; or of a mixture from which one or more 
of these elements may be absent. A large 
number of other ingredients, such as iron, lime, 
and potash, although present in comparatively 
small quantities, are important because they are 
the very elements ^ that enter into the composi- 
tion of plants. Clay is formed by the decompo- 
sition of feldspar, a mineral which also contains 
the chemical ingredients of potash and other 
valuable plant foods. Sand is the result of the 
decomposition of rock comparatively poor in 

1 The word is not here used in a chemical sense. 



34 ECONOMICS 

such elements.! Both of the two chief constitu- 
ents of the soil thus have their origin in the 
breaking up of solid rock. The chief agents 
by which nature accomplishes the immense 
task of grinding huge masses of rock into sand 
and clay are water, the atmosphere, and the 
roots of plants. 

Oxygen unites with iron to rust it, and carbon 
dioxide with lime, potash, and other substances, 
to form bicarbonates. Water aids in the crum- 
bling process in two ways. It dissolves the cem- 
ent which had held together the particles of 
the rock, performing this work with especial 
ease where it has taken up certain gases from 
the air, or in its passage through the earth. It 
enters the crevices of the rocks, and in freezing 
expands with irresistible force, breaking up any 
rocks into which it can gain entrance in frosty 
weather. Water aids in chemical decomposition 
by carrying the chemical agents of the air to 
places where the atmosphere does not otherwise 
circulate. Moreover, on exposed surfaces, moist- 

1 Most of the igneous rocks, such as granite and gneiss, contain 
both free quartz and feldspar, and their decomposition produces 
both sand and clay. 



THE ECONOMIC ENVIRONMENT 35 

ure is a strong ally of oxygen and the other de- 
structive agents. Vegetable growths cooperate 
with water and the chemical agents at every 
step. The seeds of tiny lichens attach them- 
selves to the apparently smooth surface of lava, 
quartz, or other unbroken rocks. The acid of 
the roots enables them to eat into the rock until 
it is roughened, and the rootlets themselves are 
able to find their way into the openings. Later 
the effects of growing plants become more 
obvious. Roots swollen by moisture and in 
growth force apart pieces of rock which have 
first been separated by water or the corroding 
gases. The plants keep moist the rocks upon 
or near which they grow, and their leaves give 
off a continual supply of oxygen, which, in turn, 
acts upon the surrounding rocks. All these 
processes go on quietly but constantly. They 
have not only created the soil which we now 
possess, but they are continually contributing 
new soil to take the place of that which is 
washed into the ocean. 

Water as we have seen is one of the most 
active agents in the making of soil, but its ser- 
vice does not end there. Few rocks would of 



36 ECONOMICS 

themselves yield a serviceable soil. In order 
that it may accomplish its purpose of furnishing 
the necessary conditions of plant growth, the 
decomposed rock must be thoroughly mixed. 
This again requires that parts of the soil should 
be carried long distances. Water is the great 
carrier and mixer of soils. Every mountain 
torrent brings down sand, mud, and silt from 
the weathered rocks of the mountains. In 
times of flood, when rivers are swollen beyond 
their banks, and the water sweeps over places 
not washed by the ordinary streams, tons of soil 
are carried down to the valleys and mingled with 
soils which had been brought by other tribu- 
taries of the same river. Soil is brought from 
the hillsides and mountain tops where it could 
not be utilized, to the more level valleys where 
cultivation is possible. Changes in the beds of 
rivers, and inundations occasioned by heavy 
rains, or by such causes as the dams of beavers, 
spread the soil over wide areas. 

Glaciers are also efficient carriers and pulver- 
izers. The rocks over which they pass, and 
which they carry at their sides and on their 
under surfaces, are reduced to soil and are 



THE ECONOMIC ENVIRONMENT ly 

washed into the valleys when the glacier is 
finally transformed at the melting line into a 
muddy river.^ Wind, to some extent, carries 
sand and dust, and so aids in the grand process 
of soil mixture which is finally completed by 
plants and earthworms and by the conscious 
efforts of man. 

There is one element of the soil which, as its 
name indicates, does not come directly from the 
disintegration of rocks. This is the vegetable 
mould or humus. It is not, as was formerly 
supposed, the chief source of fertility, but it is 
nevertheless an important constituent. It is 
formed by the decay of organic matter, and is 
rich in nitrogen, which plants require for their 
growth, and which they are apparently unable 
to take from the air, or from any other source 
so readily as from the vegetable mould. No 
soil is naturally fertile unless it contains a cer- 
tain amount of organic matter, and soils in 
which such matter is abundant are quite apt to 
be supplied with the other elements of plant 
food. 

1 It is an interesting fact that the soils of the states north of 
the Ohio and Missouri rivers are glacial. 



38 ECONOMICS 

Chemically, neither clay, nor sand, nor cal- 
cium contributes much, if anything, to plant 
growth; but they determine the physical char- 
acter of the soil, and the productivity of land 
depends quite as much on its physical as on 
its chemical properties. The presence of clay 
tends to make the soil moist and tenacious, 
obstructing the circulation of air in the soil and 
rendering cultivation difficult. Sand, on the 
contrary, makes the soil dry, loose, and easy of 
cultivation.^ 

Only an extremely small portion of the culti- 
vated soil is actually made use of as plant food. 
From soil of which one foot in depth will weigh 
three to four million pounds to the acre, an 
ordinary crop will take of plant food about two 
hundred pounds.^ On the other hand, the por- 
tion thus utilized constitutes only about one per 
cent of the weight of the plant itself.^ The 
rest has come from the air. The principal ele- 

1 V. d. Goltz in Schonberg's Handbiuh, Vol. I., p. 29. 

2 Avierican Encyclopcrdia, Art. Agricultural Chemistry. 

3 In the case of grass two per cent. Atwater, " The Food Sup- 
ply of the Future," in November (1891) Century Magazine. In 
Schonberg's Handbuch, v. d. Goltz estimates it at from two to 
seven per cent. 



THE ECONOMIC ENVIRONMENT 39 

ments of the soil suitable for plant food are: 
Iron, lime, magnesia, silica, sulphuric acid, 
potash, phosphoric acid, and nitrogen. In un- 
cultivated lands these elements are returned to 
the soil by the decay of the plants which have 
taken them. When the products of the soil are 
removed, whether in the form of vegetables, 
fruit and grain, or in the form of animal flesh, 
certain of the elements become exhausted. 
Potash, phosphorus, and nitrogen are the ele- 
ments that are likely to disappear in this man- 
ner. Methods are found of supplying phos- 
phates and potash compounds, but the case of 
nitrogen has been more difficult. Plants do not 
ordinarily have the power of using nitrogen in 
its pure form, otherwise there would be no pos- 
sibility of exhausting the abundant supply fur- 
nished by the free nitrogen of the atmosphere. 
Ammonia and nitric acid, both a result of the 
decay of organic matter, are the forms best 
suited for plant food. The former is a com- 
pound of nitrogen with hydrogen, and is always 
present in small quantities in the air. The lat- 
ter, uniting with various minerals to form ni- 
trates or mineral salts, furnishes the chief supply 



40 ECONOMICS 

that is obtained from the soil.^ A special science, 
agricultural chemistry, is occupied largely with 
an investigation of the methods by which these 
necessary elements may be supplied, in order 
that the fertility of soils may be systematically 
restored or increased. 

Next in order after climate and soil, belongs 
a consideration of the geographical configura- 
tion. The insular position of England has 
probably been a more important factor in 
determining the nature and development of 
her industry than either her soil or her cli- 
mate, and in nearly all countries the geograph- 
ical position has been of marked influence. 
We have already referred to the effects upon 
climate which may be traced to elevation and 
to position in relation to ocean and mountain 
ranges. Furthermore, the outline of the coast, 
the direction of navigable river courses, the 
presence of mountain passes, and, in general, 
all those features of the local geography which 
determine the difficulty or ease of communica- 
tion and migration, are to be considered essen- 

1 The recent discovery of the bacteria called " nitrifying or- 
ganisms " explains the method by which nitrogen is supplied to 
plants. Consult any recent work on bacteria. 



THE ECONOMIC ENVIRONMENT 41 

tial features of the environment of any given 
region. North America is less fortunate than 
Europe in the character of her coast-line, since 
it is less indented, furnishing fewer harbors 
and bringing a smaller portion of the entire 
area into direct contact with the ocean, the 
highway to other continents. But this is fully 
compensated by the extraordinary opportunities 
provided for access to the interior by the great 
river systems, and by the absence of serious 
mountain barriers between the various parts of 
the continent. 

Although the Alleghany Mountains were a 
temporary obstacle to the westward advance 
of the early colonists, the check was not more 
than sufficient to insure that the Atlantic slope 
should be fairly well occupied before population 
spread westward. Along the St. Lawrence 
and the Ohio, and up the course of the Mis- 
sissippi, explorers and settlers pushed their 
way over natural water-routes, still utilized by 
their successors. The deep Hudson River ^ 

1 To those who are students of both geology and economics 
it is interesting that the Hudson is a partially " drowned " 
river and that it owes its commercial importance to a slight 
subsidence and submergence of the old river valley. 



42 ECONOMICS 

with the magnificent harbor at its mouth ; the 
Delaware and Potomac with their broad estu- 
aries; the rolUng, unbroken prairies of the 
central states ; the unique system of fresh- 
water lakes ; the gradual rise of the entire 
continent toward the west, as if to encourage 
directly a rapid colonization by Europeans ; 
the rivers and mountains extending from north 
to south, as if to insure the social and political 
unity which differences of climate and natural 
productions might otherwise render difficult, — 
all these geographical characteristics of the 
continent enter as determining elements into 
her economic environment. The commerce 
and industry of America, her art and letters, 
her politics and laws, her life and thought, will 
ultimately be influenced by her climate and 
soil and geographical contour. 

Reference must be made, in closing this 
chapter, to the possession of what are known 
as mineral resources. In the popular mind 
the importance of these resources to national 
welfare is usually exaggerated, but it cannot 
be denied that their presence exercises a great 
influence upon the character of the national 



THE ECONOMIC ENVIRONMENT 43 

industry, and they must therefore be reckoned 
as a part of the environment. 

Iron ore deserves the first rank among the 
mineral resources of the earth, because of its 
wide distribution and its high place in the 
history of the arts. It is the most "useful" of 
the metals, if in assigning their relative rank 
we consider only the number of uses to which 
they may be put and the essential relation of 
such uses to the most primitive wants of man. 
Copper, tin, and lead are useful in the same 
sense of that word. Silver and gold possess 
qualities that have given them a unique relation 
to man's welfare from very early ages. Well 
adapted to many important industrial uses, they 
are also prized for purposes of personal adorn- 
ment, and in later stages of social development 
they are found to be better suited than any 
other substances to serve as a medium for the 
exchange of goods. 

The environment provides, besides the min- 
eral deposits, the results of animal and vege- 
table life. Such things as are provided 
spontaneously in a form capable of satisfying 
man's wants, are to be regarded as products 



44 ECONOMICS 

of the environment rather than of man*s eco- 
nomic activity. The most conspicuous example 
is coal, which, although a vegetable product of 
past ages, yet from an economic point of view 
resembles mineral deposits more closely than 
it does ordinary vegetable products. 

It will be more convenient to regard the 
environment as providing in general only the 
forces and crude materials of industry, and 
to treat all vegetable and animal products, 
together with the utilization of mineral re- 
sources, in a later chapter. 



CHAPTER III 

THE SOCIAL CONDITIONS OF AN ECONOMIC 
SOCIETY 

It was said at the opening of the preceding 
chapter that the environment is partly physical 
and partly social. Having outlined the physi- 
cal environment, we may next consider the 
social conditions of our economic life. 

Family life, education, religion, government, 
property, law, rebellion, riot, race antagonisms, 
and the desire for association, are less tangible 
than the features of the physical environment, 
but they are not less real or less important. 
Social institutions, and the social nature of 
man from which they grow, are fundamental 
facts of economics. 

Association with one's kind is the beginning 
of social evolution. There is no society of any 
sort until individuals are able to compare expe- 
riences. There is no advance in economic ac- 
tivity until, as a result of association, men are 
able to compare the results of different actions 
45 



45 ECONOMICS 

with relation to the quantity and quality of the 
goods which those actions produce. Desire for 
association is itself one of the most powerful 
of the influences which determine man's actions. 
It furnishes the incentive to much of his indus- 
trial activity. It modifies the form of that 
activity at every stage. 

When we speak of the desire for association 
as one of the influences which determine man's 
action, we do not refer exclusively to such 
desire for association as appears in well-de- 
veloped society and finds expression in various 
kinds of social institutions. We include also 
those instinctive tendencies for association 
which characterize primitive man and gregari- 
ous animals in general. 

Economic discussions, strictly speaking, take 
account only of those activities which result 
from conscious balancing of motives and re- 
wards. But there are countless activities in 
which there is no such conscious act of judg- 
ment, but only an immediate reaction to some 
impulse springing from the physical environ- 
ment or from man's mental mechanism. 

We are at present considering these prelimi- 



SOCIAL CONDITIONS OF ECONOMIC SOCIETY 47 

nary conditions of the economic order. It is 
impossible to form any just idea of the facts of 
man's economic life until we recognize clearly 
that this economic life is only a fragment of his 
complete existence. As a result of physical 
and spiritual forces, operating through many 
ages, man has become a creature with given 
instincts, desires, and capacities. Before we can 
understand what would happen under given 
economic conditions we must consider the 
nature of man as a whole, and form some 
estimate of the relative strength of the eco- 
nomic motive as compared with the social and 
physical influences to which he has been sub- 
jected. It is on this account that we preface 
our statement of economic principles with some 
account of the physical and social environment 
in the midst of which man's economic activity 
takes place. 

Association might be made prominent in a 
list of economic motives strictly so called, but 
its present importance for us is more fundamen- 
tal; for it is one of the first and most necessary 
social conditions of any such economic life as 
now exists upon the earth. 



48 ECONOMICS 

The Institution of the Family may be placed 
second among these social conditions. It is not 
necessary to enter upon an elaborate investiga- 
tion of the form of the primitive family. What 
concerns us is not the order of social evolution, 
but the social conditions of our present eco- 
nomic life. Among these the family takes a 
very high rank. Examples of a society in 
which the family does not hold any such posi- 
tion are abundant. Primitive peoples even now 
exist in which the tribe rather than the family 
is the unit in the consumption of acquired 
wealth. The reward of the chase and the 
booty of conquest are shared, if not equally, at 
least with reference chiefly to the relation which 
the individual bears to the tribe. Where the 
guild and apprenticeship system prevailed, ap- 
prentices lived frequently with the master-work- 
man. For many purposes the unit for the 
enjoyment and consumption of wealth then 
included a large number of persons. Now, 
however, in all countries of more advanced 
civilization the unit is the family. This fact is 
of the greatest significance in determining the 
character of the production of wealth. It 



SOCIAL CONDITIONS OF ECONOMIC SOCIETY 49 

stands in the way of any industrial organiza- 
tion of society framed with the sole design of 
seeking the largest industrial product. Simi- 
larly in the political organization of ancient 
Sparta, designed to secure the highest military 
efficiency, it was necessary virtually to abandon 
the family organization. The family, on the 
other hand, furnishes a new motive to exertion, 
and, if steadiness of production be taken into 
account, a far stronger motive to efficient pro- 
duction than is supplied by the desire for mere 
personal welfare. 

It has been recently held by eminent biologists 
that the doctrine of heredity, so far as it in- 
volves the transmission of acquired characteris- 
tics from parent to offspring, must be abandoned. 
If this position is generally accepted, it will 
bring into even greater prominence the family, 
and such other social institutions as are instru- 
mental in passing on from one generation to 
another the accumulated results of civilization 
and human experience. It will require greater 
emphasis upon the educative influences sur- 
rounding the new-born infant, as the chief 
means of treasuring up and increasing the ca- 



50 ECONOMICS 

pacities of the race. Parental love, developed 
through the family, occupies the first place 
among these influences. 

The mission of religion is to bring peace on 
earth, to strengthen the moral fibre, to aid man 
in his search for means of satisfying his spiritual 
needs. Religious association and activity exert 
an influence on man's character which affects 
his capacity for the highest efficiency in produc- 
tion. Few other social institutions have proven 
so powerful a stimulus to undertakings which 
require the cooperation of a large number of 
persons and a long interval of time for their 
completion. The truest economy regularly de- 
mands the sacrifice of temporary for permanent 
good, of immediate pleasure for a greater satis- 
faction in the future. The man of primitive 
instincts finds such sacrifice difficult, and if he 
were to depend purely upon the economic judg- 
ment of the moment the present sacrifice would 
too often outweigh the permanent gain. The 
sanctions of religion, and the vivid presentation 
of duty through the medium of religious instruc- 
tion, prevail against these mistaken judgments, 
and train the mind to a more active realization 



SOCIAL CONDITIONS OF ECONOMIC SOCIETY 5 I 

of the value of what is permanent, as against 
that which produces passing sensations of pleas- 
ure. It is precisely in this respect that there is 
found the greatest difference between the prim- 
itive instinct and the economic instinct. It is 
a mistake, though not an uncommon one, to 
credit the economic instinct with the disposition 
to place material satisfaction above those which 
spring from man's higher nature. The true 
economic instinc guards against just that ten- 
dency. It fixes the eye upon the future and 
highest want, rather than upon the lower and 
immediate want. Whether or not this instinct 
might have been developed without the religious 
influence, it is certain that religion and its agent, 
the church, have been preeminent among social 
agencies that have contributed to such develop- 
ment. 

Some system ,of general education may like- 
wise be assumed to be an indispensable social 
condition of a normal economic life. The ideal 
of education which society cherishes determines 
to what extent the conditions favorable to pro- 
duction shall be steadily developed and perma- 
nently insured. If there is a clear idea of the 



52 ECONOMICS 

extent to which scientific and thorough develop- 
ment of the powers of the future workers is 
essential to future enjoyment, there will be a 
more ready acquiescence in the sacrifice neces- 
sary to secure it. The tendencies favorable to a 
large and rational production of wealth may be 
consciously developed by society, and the result 
will be of permanent advantage to the race. 
The economic service of the public educational 
system is not even yet estimated at its true value, 
nor will it be until we instinctively attribute a 
portion of the value of all industrial products 
and professional services to the labors of the 
teachers who train the children, — including 
teachers of workshop, school, and home. 

A society which looks upon all "legislative 
interference " as pernicious will have a different 
production, both in kind and degree, from a 
society in which the state is an active and sig- 
nificant factor in the industrial organization. 
While the state is an outside power, imposing 
its will upon subjects, it is of little economic 
significance save as it arbitrarily decides what 
goods shall be made and in what manner. But 
when through the democratic organization of 



SOCIAL CONDITIONS OF ECONOMIC SOCIETY 53 

political society, action by the state has come to 
mean only one particular form of activity rather 
than another, all constraint being removed, it 
assumes an entirely new character. It comes to 
stand for collective as against isolated activity. 
The state, whether acting through its national 
organization or through any of the minor politi- 
cal organs (such as the municipality or that 
larger unit called in America the state govern- 
ment), becomes the most convenient and man- 
ageable mechanism for accomplishing a large 
number of industrial objects. It takes upon 
itself a large proportion of the industrial func- 
tions and becomes the medium through which 
society apportions the various phases of eco- 
nomic activity to its own agents, to corporate 
bodies, or to private persons. In this latter 
capacity the state is the logical though not neces- 
sarily the chronological antecedent of every 
economic activity. It is a social institution of 
an indispensable character. 

Another institution which arises in very early 
stages of social development is that of property. 
The primary distinction between mine and thine 
lies at the root of so large a part of our eco- 



54 ECONOMICS 

nomic life, that it would be difficult for us with- 
out it to picture any sustained effort to increase 
the number and useful qualities of goods. It 
is an essential element in our present ideas of 
property that this distinction should be main- 
tained by general consent, and by the official 
recognition of the state, rather than by individ- 
ual force. What is recognized is the right of 
the one who is called the owner of the property, 
so far as its nature will permit, to have the sole 
use and control of it. He may transfer this 
right to another with or without a consideration. 
He may do with it what he will, so that he do not 
trespass upon recognized rights of other persons. 

A distinction between private and public (or 
collective) property becomes sharply drawn in 
the course of the development of free enter- 
prise. The great mass of wealth becomes the 
private property of individuals. The title, how- 
ever, is not an absolute one, but is limited by 
the rights of the public to a share for public 
purposes, and by any considerations of public 
interest which the state may see fit to prescribe. 

Taxation, the process by which the right of 
the state to a regular share in the proceeds of 



SOCIAL CONDITIONS OF ECONOMIC SOCIETY 55 

industry is realized, may be looked upon as one 
of the conditions of the social environment. 
Taxation is not, in the long run, a deduction 
from income, but an investment. A canal is 
built in order that the industrial product may be 
increased ; and the necessary taxation is a pre- 
liminary investment. Short-sighted critics of 
public enterprises of this sort often find fault 
because the moderate fees usually charged do 
not yield on their face a good return upon the 
investment, entirely losing sight of the increase 
of fees that would be necessary to pay satisfac- 
tory returns under private management. The 
Post Office furnishes a good illustration. If the 
Post Office department reports a deficit, there is 
at once an outcry at the failure of the govern- 
ment, whereas the real test is whether the 
public has received a due return for its total 
investment, which is to be ascertained by add- 
ing the amount of the deficit to be raised by 
taxes to the amount realized by the sale of 
stamps. The years in which there has resulted 
a surplus are by no means necessarily to be con- 
sidered the years of best management. 

Taxation is thus the initial stage in a particu- 



56 ECONOMICS 

lar method of carrying on industry. But in 
order that that method may be effective it is 
necessary that a comprehensive system of tax- 
ation should be estabhshed, that there should 
be a ready acquiescence in the imposition of 
various kinds of taxation, that taxation should 
fall less upon individuals than upon the individ- 
ual proceeds of the national industry, that the 
system of taxation should be uniform and stable, 
so that industry may adapt itself to it as it does 
to any obstacle in the physical environment. 
It is in this way only that inequality in the 
treatment of individuals can be avoided, and an 
equitable and useful system of taxation main- 
tained. Attention has been concentrated upon 
the effort to find an equitable system of taxation. 
This is no doubt desirable, but it is still more de- 
sirable to find one which is economically useful. 
Until such a system is reached, the taxation 
which exists in any society cannot be intelli- 
gently reckoned with as a normal feature of the 
social environment. When it has once been 
realized, taxation may be utilized for social ends 
as readily as any other social institution. 

Credit is so fundamental a condition of eco- 



SOCIAL CONDITIONS OF ECONOMIC SOCIETY 57 

nomic society that our whole system of economic 
activity is sometimes said to rest upon it ; — and 
this is not far from the truth. Confidence of 
the members of society in their poHtical govern- 
ment permits the use of money as a tool of 
exchange. Confidence in each other permits 
them to make many exchanges without the in- 
tervention of money. When such exchanges 
are between two persons directly they are called 
barter, and if neither party postpones payment 
no credit is involved. If, however, either party 
does postpone payment, or if, as more frequently 
happens, the exchanges are indirect, involving 
three or more parties with a lapse of time be- 
tween the transactions, then credit becomes an 
important element. Where there is mutual con- 
fidence in the business integrity of those who 
are brought into such relations, the making and 
the exchange of goods may assume a form with 
essentially different characteristics from those 
of the primitive industry which prevails where 
it is absent. 

The final principle which need be enumerated 
among the features of the social environment, 
is that of social organization. From the sim- 



58 ECONOMICS 

plest gathering for informal discussion ^ to the 
elaborate organization of municipal enterprise, 
foreign missions, or fraternal orders, the capa- 
city of society for effective organization appears 
constantly as a condition of its economic prog- 
ress. The most important movements for defi- 
nite organization often lie entirely outside the 
field marked out by the state for its own activ- 
ity, and they are thus dependent upon the vol- 
untary cooperation of their adherents. Such 
movements as that for the organization of char- 
ity illustrate the importance of the general prin- 
ciple, while the disposition in some places to 
entrust the entire supervision of public and pri- 
vate charity to public officials is an instance of 
the easy transition from individual to collective 
action. 

All the various social conditions of economic 
activity, like the various features of the physical 
world, are interdependent, and they constitute 
not a series of conditions to be reckoned with 
individually, but a definite ejivironment, within 
which society must carry on its economic life, to 

1 Invariably resulting, it is said, in America, in the election 
of a presiding officer and a secretary. 



SOCIAL CONDITIONS OF ECONOMIC SOCIETY 59 

which that life must be made to conform, from 
which it will draw materials for the changes, 
whether moderate or radical, of the future. 
Many features of this environment will vanish, 
one by one, as newer and more adequate condi- 
tions appear. Organization is dependent upon 
association and credit. The state is dependent 
upon property and taxation. Education rests 
upon the family, the church, and the state. In- 
dustry is influenced by all social agencies. To 
the economic man the social environment is as 
real and as significant as his physical surround- 
ings. The two are never sharply distinguished, 
but blend into an economic environment with 
both physical and social features. 



CHAPTER IV 

THE MAKING OF GOODS 

In the present chapter we pass from a con- 
sideration of man's surroundings to that of his 
activities. Broadly speaking, all human activ- 
ity may be described as the increasing of the 
number, or the improving of the useful qualities, 
of goods. Every object which ministers to a 
human desire is a good, in the economic sense. 
There are many such things in nature, and in 
primitive stages of civilization these free goods 
are accepted as adequate satisfaction of the 
desires of men, with little attempt to increase 
their number or to improve their useful qualities. 
But as man becomes more at home in his en- 
vironment, he discovers that increase and im- 
provement are possible. 

Fruit and nuts, and the flesh and skin of ani- 
mals, are easily appropriated, and this appropri- 
ation is among the earliest steps in the making 
of goods. It must be understood that the mak- 
60 



THE MAKING OF GOODS 6 1 

ing of goods does not involve the creation of the 
material substance of the commodities. In that 
sense no goods are made by the persons to 
whom they are attributed. What is done is to 
give to the commodity a form which especially 
fits it to supply some want, and, after patient 
observation of the natural processes involved in 
producing the materials from which the new 
commodity has been made, to modify those pro- 
cesses in such a way as to increase the quantity 
of available materials. 

No sooner is it clearly understood that certain 
things have the power of satisfying continually 
recurring wants, than it becomes apparent that 
it would be desirable to secure a regularly re- 
curring supply of those things. The objects 
which are consciously or instinctively aimed at 
in the making of goods are : the increase in the 
number of commodities of which the utility is 
recognized, increased regularity in the supply 
of those commodities, increase in the utility (or 
want-satisfying power) of commodities. In ac- 
complishing the third object, combinations of 
materials are made which result in commodities 
entirely unlike any objects, found in nature, but 



62 ECONOMICS 

nevertheless capable of satisfying entirely natu- 
ral wants. Houses are constructed which serve 
the purpose of shelter better than the caves of 
the hillsides or the tents of skins. Food is made 
from cultivated grains which supplements the 
fruits, nuts, and flesh of animals, and is a phys- 
iological gain. Even the chase is made more 
effective by the invention of firearms. The 
substitution of goods that are made for goods 
that are found, is a characteristic of economic 
progress, the goal of which is to place man in a 
position to bring together, where he will, the 
elementary materials of production, in order 
that his residence may be determined by social 
or aesthetic considerations and not, as in earlier 
stages, by stern physical necessities. Men may 
build their homes, for example, on beautiful 
sites, and are not restricted to unpleasant spots 
selected because there are springs near by, or 
because there are woods to break the force of 
the wind. 

Two great movements are in progress con- 
temporaneously, from the moment when this 
making of goods begins : viz., the adaptation 
of man's activity to his environment, and the 



THE MAKING OF GOODS 63 

gradual modification of that environment itself, 
— or as it has recently been expressed ^ — the 
creation of a new environment within and from 
the materials of the old. When the growth is 
complete, the new will cast off the shell of the old, 
but will give place later to still newer surround- 
ings. In illustration of the first of these two 
movements, the adaptation of man's activity to 
his environment, attention may be called to cer- 
tain peculiarities in the operation of the physi- 
cal forces enumerated in the preceding chap- 
ter. Some of these forces are periodic in action, 
others are localized, in such a manner that they 
are available only at certain places on the earth's 
surface. There is always present, for example, 
a certain amount of light and heat, but the 
direct rays of the sun are periodic, day alternat- 
ing with night and the heat of summer with the 
lower temperature of winter. 

This periodic action of natural forces has an 
important influence upon economic activity, 
since the forces must be utilized at the time 
when they are active. The succession of sea- 
sons dictates the times of sowing, cultivating, 

^ Patten, The Theory of Social Forces. 



64 ECONOMICS 

and harvest, in agriculture, of the cessation of 
the shipping of the colder regions because of 
the freezing over of rivers, of activity in the 
building trades and in many other industries. 

Location is an element of no less importance. 
Coal, machinery, and muscular force may be 
taken with ever-lessening difficulty to the places 
where they are needed ; but a waterfall, a har- 
bor, and fertile soils must be utilized where they 
are found. The adaptation of economic activity 
to environment requires the discovery of the 
peculiar advantages of each region and the 
planting of those industries in each for which it 
is best fitted. That this process is by no means 
complete is excellently illustrated by the luxu- 
riant growth of weeds sometimes noticed in 
roads alongside cultivated fields in which, with 
great labor, man has induced only a scanty 
growth of grain. This comparative failure of 
man may be caused by a lack of proper methods 
of cultivation or fertilization, but it is often due 
to a mere blunder in deciding what crops to 
plant in the fields in question. The growth of 
weeds attests the fertility of the soil. The 
scantiness of the crop is equally good evidence 



THE MAKING OF GOODS 65 

that there is no adequate adaptation of plant 
and cultivation to natural conditions. 

It is true that some of the limitations of local- 
ity are removed in the course of human prog- 
ress. The waterfall remains where nature 
has placed it, but its energy is transformed 
into electricity and carried a long distance. 
The soil of a large area is too bulky for re- 
moval by man, but it is changed radically by 
the addition of new constituents. These consid- 
erations modify, but they do not destroy, the 
effect of the principle that industry must adapt 
itself to the localization of natural forces. Other 
things being equal, there is economy in utilizing 
the forces of nature" at the places where they 
are found or where they are most easily con- 
trolled, just as there is economy in utilizing them 
at the time when they are in the most avail- 
able form or when they are most active. 

A third characteristic of the natural forces is, 
that, in order to secure satisfactory results, it is 
necessary that they be set in motion in a par- 
ticular order, that the exact series of motions 
which will produce the desired result be discov- 
ered, and that the series be sufficiently extended 



66 ECONOMICS 

to permit the most efficient action of the requi- 
site forces. In modern industry the series of 
motions involved in securing even a simple 
result is often extended and complicated. If 
we desire to purchase a book, it is a simple 
matter to make the exchange and secure pos- 
session of it. But the series of actions which 
the purchase presupposes is well-nigh infinite. 
The existence of the retail and wholesale book 
stores through which the book has come, the 
printing establishment, the work of the author, 
his preparation and all the antecedent forces 
that have induced him to write, the conditions 
that have made a demand for the particular 
book, — these are only a few of the most obvi- 
ous members of the series. A complete analy- 
sis would trace back the various steps in the 
growth of each of the contributing industries. 
What is to be noticed is, that it is this infinite 
complexity which secures the simple and ready 
result. If any steps in the series were omitted, 
the difficulty of securing the result which we 
now desire would be vastly increased. 

If we can imagine a society in which the 
members attempt to. satisfy their desires di- 



THE MAKING OF GOODS 6/ 

rectly without the intervention of complex 
serial processes, the advantages of the present 
system will become clear. The man who de- 
sired a book in such a society would be under 
the necessity of preparing it. But there would 
be the work of a lifetime in preparing the 
materials, if, indeed, it were not all spent in 
attempting to understand the difficulties of 
even this preliminary task. The principle is, 
that there is economy in far-sighted direction 
of the natural forces, which secures their action, 
in a part of the series, long in advance of the 
time when the given result is expected. This 
serial action of the forces of nature is one of 
those primary conditions of the economic envi- 
ronment which, like the periodic action of cer- 
tain forces and the localization of others, rank 
among the premises of economic study. 

A fourth condition worthy of attention is that, 
for a period which can be calculated with some 
degree of accuracy, products retain the form 
given them. Ultimately all material forms 
change. Vegetable and animal bodies die and 
decay, rocks disintegrate, the products of 
human labor are consumed or perish; but 



68 ECONOMICS 

they offer greater or less resistance to change 
and disintegration, and this fact is of prime 
importance in all economic life. The discov- 
ery of methods by which greater permanence 
can be secured when desired, is one of the great- 
est economic services. A long step forward is 
taken when man substitutes for the perishable 
food of the savage, food which can be preserved 
for months, though a still more important step 
is taken when, through improvements of com- 
munication, man is rendered independent of the 
necessity for such preservation of food, by the 
certainty that constant supplies will be forth- 
coming from all quarters of the globe. 

In the preceding paragraphs illustrations have 
already been given of the second great move- 
ment in economic progress, viz., that gradual 
modification of man's surroundings, which, 
when it passes critical stages, may be de- 
scribed as the creation of a new environment 
from the materials of the old. Man does not 
escape from his environment by these changes, 
but he renders it richer in the possibilities of 
goods. Industry must become adapted to the 
new environment as, formerly, to the old, under 



THE MAKING OF GOODS 69 

penalties which are greater rather than less ; 
but the advantages of such adaptation are also 
greater. Irrigation, modification of soils by the 
addition of essential elements of plant food, and 
the planting of forests, are obvious illustrations 
of the changes made by man in the physical 
aspects of nature. Changes in the character of 
vegetation and in the breeds of animals, brought 
about by conscious effort, are essentially similar. 
A change of environment has sometimes been 
secured by a bodily migration to new regions of 
the earth. Under the new conditions, faculties 
hitherto latent are developed and, since some 
communication is usually retained with those 
left behind, the environment is virtually enlarged 
to include the best features of both the old and 
the new regions. The discovery of appliances 
by which new forces, as steam or electricity, may 
be applied to the making of goods, enlarges 
and improves the environment, by vastly increas- 
ing the number and variety of goods which re- 
sult from a given expenditure of energy. The 
development of the factory industries, at the 
opening of the present century, modified the 
environment of English economic activity more 



70 ECONOMICS 

than it would have been modified by a diver- 
sion of the Gulf Stream or the drying up of 
the Thames. The universal introduction of 
steel, within the past fifty years, into railway 
and steamship construction, into office buildings, 
bridges, and other public works, and the exten- 
sion of its use in industrial and agricultural 
machinery, has transformed the present envi- 
ronment beyond calculation. 

These changes require corresponding changes 
in man's activity, and the prosperity of any 
community is determined chiefly by the prompt- 
ness with which its industry is modified to suit 
the new possibilities of the modified environ- 
ment. It would be too much to say that the 
environment is determined by the new element 
which rises to so great prominence, for all the 
previous features, both physical and social, must 
still be taken into account; but the revolution 
resulting in the first illustration from the use of 
steam, and in the second from the use of steel, 
makes the environment essentially new and dif- 
ferent and requires a readjustment of the en- 
tire set of economic activities. The making of 
goods in one generation may demand different 



THE MAKING OF GOODS /I 

qualities from those of another, and the power 
to compete successfully in the great struggle for 
existence may depend upon the ability to secure 
the necessary readjustment promptly. A lack 
of such ability, whether physical, economic, or 
social, may mean serious diminution of welfare, 
or even, for special classes, entire destruction. 

The initial factor in the making of goods is 
the possibility of utilizing the results of plant 
growth. The cultivation of plants may there- 
fore be regarded as the beginning of industry. 
The flesh of animals used for food may be re- 
garded merely as grain and grass in a more con- 
venient form. Timber and cabinet wood, flax 
fibre, resins and rubber, perfumes, oils, and 
medicines from the vegetable kingdom, in so far 
as they are not already objects of regular culti- 
vation like cereals, will probably become so, as 
industry is more highly developed. The vegeta- 
tion of the sea yields fish, as that on the land 
yields bread and meat, and under cultivation 
might be made to yield a very considerable part 
of the necessary food supply.^ Already the cul- 

^ Atwater, " The Food Supply of the Future," in Novem- 
ber (1891) Century Magazine. 



72 ECONOMICS 

tivation of oysters in favorable coast regions has 
become a considerable industry, and the various 
fish commissions are taking measures to stock the 
inland rivers and lakes with suitable varieties of 
fish. 

The extractive industries, of which the culti- 
vation of plants is an illustration, are supple- 
mented by the carrying and manufacturing 
industries. We must avoid the vulgar error of 
supposing that the extractive industries, such as 
farming and mining, are in any preeminent de- 
gree productive. Merely because they are the 
first step in the process of securing control of 
the goods which the environment is able to pro- 
vide, it does not follow that this is an essentially 
different step from those that follow. It would 
be no less absurd to give to the water which is 
engaged in disintegrating the rock of the hills 
preeminence over that which nature uses, in 
carrying the soil into the valleys and in mixing 
its various ingredients. The making of goods 
is the name for the entire series of activities by 
which man secures from his surroundings the 
satisfaction which his nature demands. 



CHAPTER V 

THE CONSUMPTION OF GOODS 

It is not until we reach that part of eco- 
nomics which treats of the consumption, or use, 
of goods that we come into direct contact with 
the central fact of the science, viz., the relation 
between the economic environment and man's 
welfare. If we can imagine a complete cessa- 
tion of all economic activity for an instant, with 
man left in possession of the goods already 
created, and if those goods are supposed to be 
in sufficient quantities to satisfy all possible 
human desires for a brief period, as for one 
day, there will then be removed one of the 
chief limitations upon consumption, at least for 
that day, viz., the labor involved in the making 
of the goods. Are there any other limitations 
that would remain ? 

Each consumer would find that the quantity 
of any given article which he could use would 
be limited, first, by the feeling of satiety that 
73 



74 ECONOMICS 

would follow its uninterrupted consumption ; 
secondly, by the time at his disposal if he is to 
derive any benefit from other goods ; thirdly, by 
the fact that its consumption may be incompat- 
ible in kind with other pleasures from different 
sources ; and, finally, in the case of some com- 
modities, by the pain and inconvenience in- 
volved in the act of consumption. If all these 
limitations could be successively removed, as 
that of cost is removed in the supposed case, 
we should finally have a consumer who would 
not need to consider the quantity of goods at 
his disposal, for there would always be suffi- 
cient to supply his wants ; nor the relative 
pleasure to be derived from different sources, 
for there would be time for all ; nor the har- 
mony to be established by judicious choice and 
grouping of goods, for no one would be dis- 
cordant or incompatible with the others ; nor 
the effect upon welfare, for the consumption 
would not be accompanied by inconvenience or 
evil consequences ; nor, finally, the cost of 
goods, for they are supposed to be supplied 
without exertion. Such a consumer would not 
only have at his command infinite resources, 



THE CONSUMPTION OF GOODS 75 

but would be freed from all present limitations 
upon their utilization in the satisfaction of 
wants. 

The case supposed indicates the manifold 
character of the relation between man and 
goods. It may be said vaguely that all human 
beings desire all good things, and that if no 
cost were attached to them every one would 
enjoy them in unlimited degree. But besides 
the limitation of cost, and the others which 
have been enumerated and which spring from 
the very nature of consumption, the statement 
as made requires further limitation. It pre- 
supposes complete knowledge of the infinite 
variety of satisfactions which the environment is 
capable of yielding, and of the steps necessary 
to secure them. It assumes knowledge of the 
best combinations to be made among want- 
satisfying commodities, knowledge of the order 
in which they should be consumed to derive 
the maximum of pleasure, and the possession 
of a nature capable of enjoying the higher 
pleasures without sacrifice of the lower. 

From these considerations it appears that 
we must undertake an independent survey of 



'j6 ECONOMICS 

consumption and learn something of its prin- 
ciples. It will not answer to take it for granted 
that good things are desired, and to confine our 
inquiries to the processes by which they are 
brought into being. We must inquire what 
things are desired, in what order, in what rela- 
tive degree, and with what effect upon human 
welfare. We must inquire how people come to 
attach more importance to some goods than to 
others, and more to certain quantities of any 
given article than to additional quantities ; 
why the order in which goods are estimated is 
different at one time from the order which 
prevails earlier or later; and why this order 
is sometimes subject to violent fluctuations. 
Finally we must inquire, whether social prog- 
ress is attained primarily by a modification in 
the character and order of man's wants, or by 
a modification in the character and intensity of 
his activities, or by an admixture of the two. 
In our preliminary view of the making of 
goods we have had to do entirely with forces, 
physical and social. Wealth is produced by 
the operation of physical forces on material 
substances. These forces are under man's 



THE CONSUMPTION OF GOODS yj 

control, and it has therefore been necessary to 
consider the social conditions of economic activ- 
ity, as well as the physical conditions upon 
which it is based. In the study of consump- 
tion we have to do with utilities. A utility, in 
its concrete sense, is that which satisfies a de- 
sire. A good, or commodity, is the material 
substance in which a utility or a group of utili- 
ties is embodied. We are therefore viewing in 
a different way the same goods into the making 
of which we have already had glimpses. 

The making of goods would be described 
with perfect accuracy as the creation of utili- 
ties. Although in industry no matter is 
created, matter which was without the power 
of satisfying desire is put into such form, or 
removed to such place, as to endow it with 
that power, or, in other words, to create utili- 
ties which did not before exist. Consumption 
is the destruction of utilities in such a man- 
ner that the satisfaction which the commodity 
was able to produce is actually experienced. 
The test of consumption is the degree of 
satisfaction obtained. It is obviously an error 
to look upon the creation of new utilities as a 



78 ECONOMICS 

test of consumption, and to condemn all con- 
sumption from which there does not emerge 
a greater number of utilities than is de- 
stroyed. A destruction of utilities from which 
new utilities emerge, is, strictly, not consump- 
tion at all, but one form of production. The 
shoemaker, it is said, consumes leather in the 
production of shoes. But the utility embodied 
in the leather has disappeared in the one 
form only to reappear in another. It has not 
been destroyed. No want has yet been satis- 
fied. Something very different takes place 
when the shoes are worn out. Here the 
utilities are destroyed. The desire, whether 
it be for ornament or for protection, has been 
satisfied. Nothing else than this should be 
called consumption, unless some qualifying 
word is added to indicate the meaning. 

We may use the term " productive consump- 
tion " to designate the transformation of utili- 
ties from one substance to another, when no 
desires are satisfied in the process. 

Waste is a destruction of utilities from 
which there is obtained neither new utilities 
nor the intended satisfaction. Nearly all con- 



THE CONSUMPTION OF GOODS 79 

sumption involves some measure of waste, 
and, though to a less extent, the productive 
process too is accompanied by waste. A fail- 
ure to create the greatest number of utilities 
with a given expenditure of energy, must be 
regarded as waste, and consequently those 
forms of consumption which allow existing 
productive agencies to be utilized most fully 
must be regarded as least wasteful. It goes 
without saying that it lies in the interests of 
all to reduce to a minimum the waste in each 
of these directions. The most urgent need of 
all is for greater economy in consumption, as 
will appear more fully in subsequent pages. 

Production and consumption together cover 
the whole field of man's economic activity. 
The consumption of wealth^ is uniformly 
accompanied by the sensation of pleasure. 
The degree of pleasure varies directly with 
the utility of the commodity. The utility is 
indeed only an expression of the possible satis- 

1 Wealth is a collective term including all kinds of commodi- 
ties. Anything which possesses positive utility, as defined in 
the next paragraph, is wealth. See opening paragraph of 
Chapter I. 



80 ECONOMICS 

faction to be derived from the commodity. 
There is no necessary or direct connection 
between the effort involved in the production 
of the commodity and its utility. The two 
may, however, be directly compared, for pro- 
duction always involves some degree of pain^ 
or subjective cost, which is a sensation di- 
rectly opposed to the pleasure obtained from 
consumption. The whole science of eco- 
nomics rests upon the possibility of thus com- 
paring pains, or subjective costs of production, 
with pleasures obtained as a result of eco- 
nomic activity. 

In investigating the facts concerning con- 
sumption we shall early find some among 
them that cannot readily be reconciled with 
the simple conception of utility above set 
forth : viz., that utility is the power of satisfy- 
ing desire directly, and that consumption is 

1 *' Pain " is the word commonly used as the name of the sensa- 
tion opposed to pleasure, though there are objections to its use, 
because of its association with disease or other abnormal physi- 
cal conditions. Subjective cost has the same meaning. The 
word " cost " alone is used in this sense by Cairnes and other 
writers. As so used the word " cost " must not be confused 
with money costs. It means the actual dis-utility experienced in 
production. 



THE CONSUMPTION OF GOODS 8 1 

uniformly accompanied by the sensation of 
pleasure. It will be found that certain com- 
modities are consumed in order to preserve 
life or to restore health, though they confer 
no immediate pleasure. Others will be con- 
sumed because they are essential to some 
pleasure to be obtained from a future con- 
sumption. It may be that the commodities, 
first consumed, which are in rank subordinate 
and secondary, confer pain rather than pleas- 
ure. In estimating the pleasure from the 
second commodity, the one chiefly concerned, 
it is necessary to make a deduction for the 
dis-utility of the first, before a just estimate 
of the entire consumption is possible. 

Any commodity which is essential to life 
may be said to possess absolute utility. This 
kind of utility cannot be economically meas- 
ured. Any commodity which is consumed 
only because of its absolute utility, or because 
its consumption is required for the sake of 
some other pleasure, may be said to have 
negative utility, or dis-utility. Commodities 
which are consumed for the pleasure which 
they confer, on the other hand, have positive 



82 ECONOMICS 

utility. An article which has absolute utility 
may possess also positive utility, as is the case 
usually with food ; or it may be neutral, so 
that no economic account need be taken of 
it, — ' as with air ; or it may have dis-utility of 
which, again, account must be taken as a 
deduction from the pleasure enjoyed from 
consumption. This would be true, for in- 
stance, of torn or ill-fitting garments which 
we were compelled to wear in the absence of 
suitable clothing, or of the consumption of 
disagreeable medicine.^ 

It should be pointed out that utility must 
often pass through several steps before it 
reaches the desire to which it corresponds.^ 
The leather of which shoes are to be made 

1 Absolute utility is the satisfaction of mere living. Positive 
utilities refer not to life, but to the content of life; they are the 
sum of satisfaction that can be added to bare living. Negative 
utilities are the pains that detract from the pleasure of living. A 
man may have the absolute utility of life, yet he may suffer all 
kinds of pain and be on the point of suicide. Every life con- 
tains the absolute utility of living plus certain positive utilities or 
pleasures, minus certain negative utilities or pains. — Patten, 
Dynamic Economics, p. 40. 

2 A fertilizer is useful to enrich a meadow; the meadow is 
useful to produce hay; hay is useful to feed horses; and horses 



THE CONSUMPTION OF GOODS 83 

possesses a mediate or indirect, though it is 
clearly a positive, utility. The desire for pro- 
tection for the feet cannot be met until a further 
act of production, the transformation of the 
leather into shoes, has taken place. The satis- 
faction of the desire involves a long industrial 
process which is partially completed when the 
leather is produced. In the strict sense no util- 
ity has yet been produced ; but for convenience 
in rewarding the efforts of producers the indus- 
trial process is divided into distinct operations, 
and at the end of each a utility is said to have 
been created. A utility is attributed to the un- 
finished product, derived from the anticipated 
utility of the commodity into the production of 
which it is to enter. It will be less than the 
utility of that commodity, because time must 
elapse and further productive effort be ex- 
pended before its transformation is complete.^ 
But all commodities find their ultimate goal 

are useful to do service. From the fertilizer to the man are 
several steps, but it is the final step which makes all the others 
count. — Gregory, Political Ecojio/Jiy. 

1 Compare the distinction made in Chapter XIII. between 
future and present goods. From the study of consumption all 
consideration of future goods is excluded, since it is only present 



84 ECONOMICS 

in ministering to human wants. The whole 
material environment is a vast aggregate of 
useful things, the power of which to yield posi- 
tive utility grows steadily greater. The natural 
forces remain constant, but man's control over 
them increases with invention and social prog- 
ress. Every new capacity for enjoyment finds 
existing the necessary physical conditions to 
provide for it. Because man's industry is not 
adapted to those conditions, and because the 
pleasures are not selected in the order indicated 
by the economic conditions, the possible utilities 
are not realized, and the pain involved in secur- 
ing those which are realized remains dispropor- 
tionately intense. To society as a whole the 
environment is capable of yielding utilities in- 
finite in number and of infinite variety. The 
limitations actually experienced are to be traced 
to subjective causes. 

The individual is restricted in his choice of 
utilities by the expense which he must undergo 
to secure them and by the amount of time at 

goods that can be consumed. P'uture goods may, of course, be 
*' productively consumed," or they may be destroyed through 
waste. 



THE CONSUMPTION OF GOODS 85 

his disposal for their enjoyment. Certain com- 
modities are absolutely excluded by reason of 
their cost. From those which remain he chooses 
first that one which yields the largest surplus 
of utility over the cost involved in securing it, 
and then other commodities in the order of the 
surplus utility which they yield. This is the 
true economic order of consumption. It differs 
from the natural order, by which is meant the 
order in which commodities would be chosen, 
if they were entirely free. Those commodities 
which have a large surplus of utility over cost 
would be chosen, in the economic order, before 
others with a higher total utility but lower cost. 
If we consider the various single commodi- 
ties chosen as made up of a succession of in- 
crements, each corresponding to the same unit 
of expenditure, we shall find that those incre- 
ments are not possessed of uniform utility. 
The first increment of any commodity will have 
a maximum utility. The succeeding increments 
will steadily diminish in utility until, when the 
desire for the commodity in question is entirely 
satisfied, an increment is reached of which the 
utility is zero. Long before this point is 



S6 ECONOMICS 

reached, however, a second commodity will have 
been chosen, the first increment of which has a 
utility perhaps nearly as great as the highest 
increment of the first commodity. The suc- 
ceeding increments of this second commodity 
diminish in utility as did those of the first. 
This experience is repeated with a third and 
fourth commodity, in each case the utility of the 
highest increment ranging between the highest 
and the lowest increment of the next preceding 
commodity, tending generally to approach the 
higher. In some instances it may even be quite 
as great, since the pleasure afforded by the first 
increment of two commodities may balance, 
and it might thus become a matter of indiffer- 
ence which should be chosen first. 

This law of diminishing utility may be ex- 
pressed arithmetically by the erection of a scale 
of diminishing utilities. The various commodi- 
ties are represented by the letters A, B, C, D, 
etc., in the order in which they are chosen by 
the consumer. If the first increment A yields 
a utility of ten units, its succeeding increments 
may be represented as diminishing uniformly 
in utility until of the eleventh or final incre- 



THE CONSUMPTION OF GOODS 8/ 

ment the utility is zero. The first increment 
of B yields, it may be, but eights units ; the first 
increment of C, six units ; and the first incre- 
ment of D, three units. If we assume for 
convenience that there are only these four com- 
modities from which to choose, the various 
increments, each designated by the number 
expressing its utility, may be arranged as fol- 
lows in the order in which they are chosen 
lo A, 9 A, 8 A, 8 B, 7 A, 7 B, 6 A, 6 B, 6 C, 
5 A, 5 B, 5 C, 4 A, 4 B, 4 C, 3 A, 3 B, 3 C, 
3 D, 2 A, 2 B, 2 C, 2 D, I A, I B, I C, I D. 
This is the so-called scale of diminishing utili- 
ties. It is generally arranged in the following 
form : 



A 


B 


C 


D 


10 








9 








8 


8 






7 


7 






6 


6 


6 




5 


5 


5 




4 


4 


4 




3 


3 


3 


3 


2 


2 


2 


2 


1 


I 


I 


I 


O 


O 


O 


o 



88 ECONOMICS 

The numbers arranged under the letters 
which designate the commodities represent 
the succeeding increments of those commodi- 
ties. Three increments of A (lo, 9, and 8) will 
be desired before any of the others. Five 
increments of A and three of B will be con- 
sumed before any of C or D, and so on. If 
each increment represents what can be secured 
by one hour's labor, and A stands for food, B 
for clothing, C for shelter, and D for ornament, 
the scale would express the following facts : 
that two hours' labor would be devoted to the 
production (or securing possession) of food 
before any other commodity could be consid- 
ered. That the third hour would produce an 
equal utility whether devoted to clothing or 
food, so that half of it would probably be 
given to each. That it would be only after six 
hours' labor, of which four had been given to 
food and two to clothing, that sufficient pleasure 
could be derived from shelter to furnish an 
inducement to devote a portion of the time to 
the task of securing shelter. The correspond- 
ing numbers in the different columns represent 
different utilities, equal in amount and equally 



THE CONSUMPTION OF GOODS 89 

difficult of acquisition. If each separate desire 
could be completely satisfied, it would be found 
that ten increments of A, eight of B, six of C, 
and three of D had been consumed. 

The idea of utility, developed at length in 
the preceding paragraphs, has been introduced 
into recent economic discussions as a basis for 
the theory of value. In a later chapter on 
the subject of value the relations between 
value and utility will be examined, but there 
are first to be made other and more funda- 
mental applications of the conception of utility 
within the field of consumption.^ The study of 
consumption, like that of production, is wholly 
independent of considerations drawn from the 
theory of value. But consumption is vitally de- 
pendent on utilities. When the available utili- 
ties are increased, consumption is improved ; 

^ One of the first things the student of economics learns 
is that the end of economic action is the creation of " utili- 
ties." . . . But unfortunately for the student, he is, as a rule, 
no sooner introduced to this lofty conception than he is hurried 
past it by the necessity of measuring the results of economic 
action. Without much warning, the wide word " utility " is put 
aside in favor of the word " value." ... All the while the last 
word in political economy is not value, but utility. — William 
Smart, in Annals of the American Academy, Vol. III., p. 257. 



90 ECONOMICS 

when they are lessened, consumption suffers. 
If, with comparatively little effort, society finds 
itself able to satisfy very completely all its 
lower as well as its higher desires, the economic 
statement of that fact is that there is a large 
surplus of utilities over costs. It is immaterial 
to society as a whole whether these utilities 
have "values" or not. If they are produced 
with so much ease and in so great quantities 
that they become free goods, they do not on 
that account contribute less to the comfort and 
happiness of man. The theory of consumption, 
therefore, entirely disregards alike " market " 
and "normal" and even "subjective" values, 
concerning itself with an investigation of the 
pleasure-giving entities which we call utilities. 
This distinction is one which should be 
clearly seen. No commodity can have a value 
unless it can be appropriated. But many goods 
which are not appropriated have great utility. 
In the theory of value it is of prime importance 
that the commodities be fitted for ownership, 
that the ownership be transferable from one 
person to another. But the theory of con- 
sumption and of prosperity and of progress 



THE CONSUMPTION OF GOODS 9 1 

must take account of goods not thus suited 
to private or even public ownership. Free 
goods, non-appropriated goods, are consumed, 
and they must be taken account of when a 
general estimate of the prosperity of a commu- 
nity is to be formed. 

The true starting-point in the construction 
of any complete theory of economics lies in 
consumption rather than in production. Pleas- 
ures and pains, rather than physical forces, 
are the initial and fundamental economic facts. 
Wants precede satisfactions. The study of 
human wants, not merely in the abstract man- 
ner so common in theories of morals, but in 
the concrete manner made possible by the 
introduction of economic measurements, may 
be carried on independently of and prior to 
the study of the productive agencies. This 
order of development is not only possible, it 
is the more logical and fruitful. The one who 
looks upon every step forward in social prog- 
ress as a " development of new activities 
giving rise to new wants," ^ who sees the 
obstacles to progress mainly in certain physi- 

1 Marshall, Principles of Economics, Vol. I., p. 147, 2d ed. 



92 ECONOMICS 

cal hindrances to the development of industrial 
activity, will, if he construct a theory of prog- 
ress and of economics, base it upon different 
premises and formulate it in different terms 
from those employed by the economist who 
holds that the environment which men find " de- 
pends upon their mental characteristics," ^ who 
looks upon every step forward primarily as a 
modification of men's desires and ideals, who in- 
sists that economic activity at any particular 
point will always be determined by the ideals to 
which man has already attained, the initial step 
in further development being an advance in 
man's ideals, a modification of the psychical con- 
ditions of wealth production which have their 
origin in the prevailing consumption. The re- 
sults of progress from this latter standpoint will 
be sought mainly in man himself, in the devel- 
opment, for example, of new tastes which allow a 
fuller exploitation of the natural resources. All 
social progress and activity may thus be viewed 
from the industrial standpoint of production or 
from the economic standpoint of consumption. 

1 Patten, Dynatiiic Economics, p, 38. 



CHAPTER VI 

PROPOSITIONS CONCERNING CONSUMPTION 

The economic order of consumption is modified 
by changes in the relative cost of producing dif- 
ferent commodities. It has been pointed out in 
the preceding chapter that commodities are 
chosen not in the order of their positive 
utiHty, but in the order of their surplus of 
utihty over cost. Any modifications in the 
productive processes, therefore, which affect 
the costs of producing certain commodities 
more than the cost of producing others, since 
they affect the surplus of utility, must modify 
the economic order. This modification is inde- 
pendent of any changes in the positive utility 
of the commodities. The construction of a 
railroad will cheapen the production of a mul- 
titude of commodities, but will affect those 
produced at greater distances more than those 
produced near at hand. If it affected all alike, 
it could not modify consumption. It does not 
93 



94 ECONOMICS 

increase the utility of the commodities pro- 
duced at a distance, but it increases their 
relative surplus by lowering their relative cost. 
If for any reason costs are increased, but not 
uniformly, a similar modification takes place. 
Taxation never affects the cost of all com- 
modities alike. It therefore influences con- 
sumption, leaving the surplus larger on certain 
commodities than on others. The immediate 
effect of such modifications may be an increase 
or a decrease in the variety of consumption. A 
cold climate adds to the cost of producing all 
kinds of food which are to be met with in tropi- 
cal climates. But it increases the cost of 
securing fruit more than that of producing 
meat. In the warm climate there is a much 
greater surplus in fruit than in meat. The 
colder climate diminishes the surplus in each 
case by increasing the cost, but diminishes the 
meat surplus less than it does the fruit surplus. 
Under these circumstances it will be easier to 
increase the variety of consumption, since there 
will be almost or quite as much inducement to 
produce the one as the other.^ 

1 Patten, Consumption of Wealth, p. 47. 



PROPOSITIONS CONCERNING CONSUMPTION 95 

The economic oi'der of consnniptioit is modified 
by changes in appetites. Progress from primi- 
tive to advanced stages involves a decrease in 
the intensity of the appetite for food, and par- 
ticularly for the few varieties of food and drink 
which are so eagerly desired by human beings 
on a low plane of civilization. The first reason 
for the greater intensity of appetite under 
primitive condition is the irregularity of the 
food supply. The appetite must be stronger, 
the capacity for food greater, when periods of 
scarcity succeed those of plenty. When food 
is regularly supplied, the need for the more 
intense appetite disappears. The few articles 
of which the diet of primitive man is composed 
contain necessarily all the food elements essen- 
tial to the system ; but while rich in some of 
these elements, they are poor in others. An 
increase of variety, if it adds to the diet articles 
which contain larger proportions of those ele- 
ments which are present in the earlier articles 
only in small quantities, will result in a further 
decrease of appetite. If one eats only meat, it 
is necessary to consume larger quantities in 
order to get a sufficient amount of starch and 



96 ECONOMICS 

other elements demanded by the system ; but 
if corn and potatoes are added to the diet, the 
needs of the system for these particular ele- 
ments are much more quickly supplied, fewer 
pounds of food need to be taken when the diet 
is thus varied, and the appetite is correspond- 
ingly reduced. 

Improvements in shelter and in clothing 
lessen materially the demand of the system 
for food, as a source of animal heat, the 
effect of which may be seen in the decrease 
of appetite ; and finally the tendency is still 
further strengthened by the introduction of 
machinery and mechanical devices which re- 
lieve the system of the muscular strain in- 
volved in heavy manual labor.^ A reduction 
of appetite for food has followed each of 
these changes, but it has shown itself much 
more with some commodities than with others. 
A measure of disgust becomes associated with 
the thought of eating the very kinds of food 

1 Professor Marshall speaks of the effects of machinery in 
relieving that " excessive muscular strain which a few genera- 
tions ago was the common lot of more than half the working- 
men even in such a country as England." 



PROPOSITIONS CONCERNING CONSUMPTION 97 

that once gave, and if the older conditions 
were restored would again give, the keenest 
pleasure. These changes in appetite modify 
the economic order of consumption by act- 
ing not on the cost, but on the utility. Cost 
may remain the same, but surplus utility is 
reduced because total utility is reduced. Since 
the utility is not reduced on other commodi- 
ties as it is on food, and since it is not uni- 
formly reduced on all kinds of food, the 
order in which commodities are desired is 
changed. The economic order of consumption 
is therefore modified by any changes in appetite. 
Increase in variety modifies the economic 
order of consumption by lessening the negative 
titilities. As the consumption becomes more 
varied, and the appetite for the few com- 
modities less intense, greater harmony is in- 
troduced into the consumption, and the relative 
number of commodities which yield positive 
utility is greatly increased. Under primitive 
conditions those commodities which have ab- 
solute utility, or life-sustaining power, must 
be preferred to those which, if the cost were 
not too high, would be chosen on account of 



98 ECONOMICS 

the pleasure which they are capable of giv- 
ing; but all the productive energies must be 
concentrated upon the absolute utilities. The 
absolute utilities are chosen of necessity, even 
though they are also negative rather than 
positive utilities. It is gradually discovered, 
however, that for these negative utilities 
others may be substituted which are both 
absolute and positive utilities. Food is dis- 
covered which is capable of both yielding 
pleasure and sustaining life. Articles of fur- 
niture are invented which please by their 
appearance and serve the same purposes as 
the cruder and clumsier furniture first in- 
vented. Dress becomes beautiful and com- 
fortable as well as fitted to protect from heat 
and cold. Those commodities which are neu- 
tral or negative as to their utility are dis- 
placed continually in a progressive society 
by others which have absolute utility, as did 
the first, but positive utility as well. This 
gradual elimination of negative and neutral 
utilities is one of the chief modifications to 
be observed in the economic order of con- 
sumption. 



PROPOSITIONS CONCERNING CONSUxMPTION 99 

The pleas lire derived from the consumption 
of a given number of commodities is increased 
zvhen combinations of complementary goods are 
formed. It is possible that two commodities, 
both possessing positive utiHty, may, when 
consumed together, enter into such relation 
with each other as to yield a utility greater 
than the sum of the separate utilities. Sugar 
and fruit eaten together form such a com- 
plement, since the one renders the other 
palatable, while neither, perhaps, would be 
eaten if they could not be eaten together. 
A saddle has positive utility only when there 
is a horse vv^ith which it can be used. The 
utility of the whole complement is a positive 
quantity which cannot be ascertained by add- 
ing the separate utilities of the separate com- 
modities of which it is composed. The utility 
of a picture may be very greatly increased 
by changing its relation to other objects in 
the same room. The utility of a group, 
which is necessary to the satisfaction of a 
given desire, may be continually modified by 
substituting for some one element in it an- 
other commodity which has of itself no greater 



100 ECONOMICS 

utility, but which harmonizes better with the 
other elements of the group. If commodities 
are consumed in a haphazard way, without 
regard to their relations to each other, a large 
part of their possible utility is lost. If the 
consumer fails to grasp new opportunities to 
substitute for the inharmonious elements others 
which would as well answer the individual 
needs in question, and at the same time fit 
more harmoniously into the general consump- 
tion, he is compelled to retain in his con- 
sumption the cruder and more primitive 
groups of commodities, and thereby sacrifices 
a pleasure which could have been obtained 
without additional effort or cost. Normal 
economic consumption is distinguished from 
primitive consumption more by this difference 
than by any other. 

Pleasure is lessened by the forced combination 
of discordant utilities. Progress lies in the 
direction of forming the kind of groups indi- 
cated in the preceding paragraph. The natural 
group is not that which happens first to have 
been formed by primitive beings, but the one 
in which the elements unite with the least loss 



PROPOSITIONS CONCERNING CONSUMPTION 10 1 

of utility. Unnatural and discordant groups 
are formed because of ignorance of the rela- 
tions between them, or because, from habit, the 
old commodities are retained long after the 
time when, by a change in the methods of 
production or in the conditions of life, there 
has been made possible a new and better com- 
bination. 

It can be scientifically demonstrated that the 
consumption of highly flavored food, or rich 
pastry, or tobacco, is highly incompatible with 
the greatest pleasure from a healthful and nu- 
tritious diet ; but this fact, if popularly known, 
is at least not realized with sufficient vividness 
to control the actions of even the majority of 
persons. Forced and discordant combinations 
are made which are injurious to the system, 
and which not only lessen possible pleasure, 
but often produce much suffering. Possible 
positive utility is thus transformed by unwise 
consumption into negative utility. Artists are 
able to point out innumerable popular errors 
in the combinations of colors which are made 
in dress and in house ornamentation, yet, be- 
cause of the popular ignorance on these mat- 



102 ECONOMICS 

ters, inharmonious combinations are retained, 
and the possible pleasure is not realized. Taste 
for good literature is destroyed by the perusal 
of trashy stories. In other words, the two 
kinds of literature are not complementary, but 
discordant. On the other hand, a perusal of 
good fiction or of poetry may increase the 
pleasure which the reader subsequently ob- 
tains from the study of history, and may not 
be incompatible with the study of scientific 
treatises. The whole complement literature 
yields a pleasure which may be regarded as a 
unit. The utility of the commodity literature 
will be less if the elements which compose it 
are discordant, and will be greater in propor- 
tion as they form a harmonious complement. 

The economic order of consumption is modified 
by the mental act by zvhich the increase of utility 
is iynputed, i.e., attributed to the various ele- 
ments which compose the group. The pleasure 
from a complement of commodities is a unit, 
but the complement itself is complex. Each of 
the commodities will be recognized to have con- 
tributed at least that amount of utility which 
it would have had if consumed in isolation ; but 



PROPOSITIONS CONCERNING CONSUMPTION 103 

after all the commodities have had that amount 
assigned them, there will remain all the in- 
crease of utility which results from the forma- 
tion of the complement. This increase is not, 
as might at first be expected, distributed evenly 
or in proportion to the original utility of the 
commodities. On the contrary, there is always 
a tendency to concentrate the whole of the 
increase on that one element or on the limited 
number of elements which have been last 
added to the complement, and which are there- 
fore looked upon as having completed it, and 
thus added to the utility of ail the other mem- 
bers of the group. At a dinner, for instance, 
the agreeable result of the meal as a whole is 
apt to be attributed to some new or favorite 
dish, the absence of which, though the dish has 
of itself no great utility, would spoil the entire 
meal. In an academic course the student is 
always inclined to account for the benefit which 
he knows that he has received from the course, 
by referring to the instruction of a favorite 
teacher. At a concert the listener will attrib- 
ute to some special performance the pleasure 
afforded by the entire programme. This act 



104 ECONOMICS 

of imputation is a mental act. The principle, 
in accordance with which the utilities of certain 
commodities are increased, because of their 
relation to other commodities in the group of 
which they form a part, is a psychological 
principle. Commodities are desired in a differ- 
ent order because the utility of certain com- 
modities is thus increased. The economic order 
of consumption is modified, therefore, by the 
imputation of utility. 

The final increments of the different commodi- 
ties consumed tend to rise and fall together. 
Attention has already been called to the fact 
that commodities are consumed in a certain 
order, and that the successive increments of 
each commodity satisfy wants of steadily dimin- 
ishing intensity. By the final increment of any 
commodity is meant the last increment actually 
consumed. By the marginal increment of con- 
sumption is meant the final increment of the 
last commodity added to the consumption. It 
might be supposed that this marginal increment 
would satisfy a much lower desire than the final 
increments of the commodities which have pre- 
cedence in the economic order. If it were a 



PROPOSITIONS CONCERNING CONSUMPTION 105 

question of the initial increments of each com- 
modity instead of the final increments, there 
would be such a difference. But the final incre- 
ment of this last commodity has as great, or 
nearly as great, utility as the final increments of 
any of the preceding commodities. The differ- 
ences in the pleasure obtained from different 
commodities are to be found, not in their final, 
but in their earlier increments. At the point 
where the consumption is broken off they have 
about equal power of conferring pleasure ; other- 
wise the consumer would transfer a portion of 
his expenditure from the commodity which gave 
less pleasure, to one which gave more. In this 
way a more intense want for the first commod- 
ity would be left as the final want, and a less 
intense want for the second commodity would 
be satisfied. For instance, food to the starving, 
shelter to the homeless, crowd out all other 
thoughts ; but, with a dollar to spare, a man 
may hesitate whether to indulge in a joint of 
beef, to have a broken window-pane set, or to 
buy Loi'na Doone and read it to his family. It 
might happen that radical changes in the desires 
of a consumer would leave his consumption tern- 



I06 ECONOMICS 

porarily in the condition indicated by the follow- 
ing scale : 
ABCDEFGHIJK 

9 9 9 

8 8 8 8 8 

7 7 7 7 7 7 7 7 7 

666 666666 

5 5 5 5 5 5 5 5 

4 4 

3 

2 

The final increment of the larger number of 
commodities is 5. But there are three com- 
modities, say newspapers, woollen clothing, and 
rocking chairs (C, D, and K), of which the final 
increments remain 6, 7, and 6, respectively ; 
while two other commodities, say house accom- 
modation and table silver (A and H), satisfy 
their respective wants so fully that their final in- 
crements fall in utility to 4 and 2. This unbal- 
anced condition cannot long remain. The more 
intelligent the consumption, the more quickly 
will normal conditions be restored. A slight 
reduction in house rent, and a considerable re- 
trenchment in the expenditure for table silver 
will allow a daily newspaper to take the place 



PROPOSITIONS CONCERNING CONSUMPTION 10/ 

of a weekly ; will allow a more adequate supply 
of woollen clothing, and the purchase of an addi- 
tional rocking chair. This readjustment of con- 
sumption to the conditions brought about by 
the growth in intensity of certain desires, as 
compared with others, is continually in progress. 
Its tendency is to cause the final increments of 
all commodities to satisfy wants of equal inten- 
sity; in other words, to cause the final incre- 
ments of all commodities to have equal degrees 
of utility. 

The margin of consinnption is fixed by the re- 
lation between man and his environme^it. From 
the preceding discussion it will be seen that the 
margin of consumption may be regarded as a 
straight line, or one continually tending to be- 
come straight, and forming the boundary line 
of actual consumption. In the illustration above 
given, after readjustment is complete, the mar- 
gin is a straight horizontal line passing below 
the final increments of the commodities. The 
margin may be indicated by the omission of the 
numbers below it, as in the preceding illustra- 
tion, or by the drawing of a line, as in the fol- 
lowing illustration : 



I08 ECONOMICS 

ABCDEFGHI JKLMNOPQR 

9 9 9 

8 8 8 8 8 

7 7 7 7 7 7 7 7 7 

6666666 666 

5 5 5 5 5 5 5 5 5 5 5 

444444444444 4 

3333333333333 3 3 

22222222222222222 2 
I I I I I I I I I I I I I I I I I I 

ooooooooooooooooo o 

All commodities have a definite relation to 
this line, their successive increments ranging 
either partly above and partly below or entirely 
below it. Of commodities which begin with 
a very high degree of utility, a considerable 
number of increments will be found above the 
margin, i.e., a considerable quantity of the 
commodity is consumed ; of others but few 
increments are above the margin ; while still 
others, and always vastly the greater number 
of commodities, are, for the man of moderate 
means, entirely below the margin. They may 
be conceived as arranged in a particular way 
below the margin, waiting, as it were, until the 
margin falls far enough to include them, and 



PROPOSITIONS CONCERNING CONSUMPTION 109 

certain to make their appearance at that time 
in accordance with a definite order, the eco- 
nomic order of consumption.^ What is the rea- 
son for the changes in the position of this line, 
for the rise or fall in the margin of consump- 
tion ? The broadest answer is that it is fixed 
by the relation existing at the given time be- 
tween man and his environment; and for our 
present purposes this answer is sufficiently 
accurate. Man's power over nature is indi- 
cated by his ability to utilize more efficiently 
the natural resources in the satisfaction of his 
desires. As this power increases, the margin 
of consumption falls. With each step in indus- 
trial progress, wants of less and less intensity 
are satisfied. If we disregard changes in 
human wants,^ a fall in the margin of consump- 
tion will be regarded as an indication of prog- 
ress. After each increase in the variety, and 

1 This order is of course not fixed in the sense that it is in- 
capable of modification. The object of this entire chapter is to 
show that it is continually changing, but in accordance with 
principles which may be investigated and clearly established. 

2 An important condition. The modification of conclusion 
necessary on taking account of changes in wants will receive 
careful attention in the next chapter. 



no ECONOMICS 

especially after the addition of any more intense 
want, there will be a renewed effort to satisfy the 
whole range of wants even more completely than 
before. The margin falls in exact correspond- 
ence with the success of that effort. The 
margin of consumption is therefore fixed by the 
relation between man and his environment. 

The law of progress^ so far as it affects the 
consumption of the individual^ is that the mar- 
ginal increment of constcmption satisfies at each 
period a want of greater intensity than at the 
preceding period. There are two opposite ten- 
dencies : one toward the improvement of the 
mechanical processes of production springing 
from industrial progress ; and one toward the 
development of new wants springing from 
social progress. The latter tendency deter- 
mines the extent to which positive utility will 
be found to reside in commodities which had 
before been regarded as neutral or negative, 
and the extent to which the positive utilities of 
other commodities will be increased relatively 
to their cost. In a progressive society this 
latter tendency will prevail over the other in 
determining the actual position of the margin 



PROPOSITIONS CONCERNING CONSUMPTION 1 1 1 

of consumption. Although the margin might 
fall because of the fact that with a given 
amount of energy given wants are more fully 
satisfied, it is prevented from doing so by the 
growth of new wants and by changes in the 
relative intensity of wants that had previously 
existed. Commodities that had been entirely 
below the margin are brought above it by the 
discovery of new uses to which they may be 
applied. The work of the last hour of the 
laborer's day satisfies a want of greater inten- 
sity than it previously did because of these 
changes in desires. If wants had not changed, 
that hour would satisfy a less intense want than 
it formerly did, because, each of the previous 
hours of the day having become more produc- 
tive, all the more intense wants would have 
been already satisfied before that hour had 
been reached. Temporarily the margin may 
fall immediately after great changes in the pro- 
ductive processes, but eventually, if there is 
social as well as industrial progress, the mar- 
gin will rise, the law of progress being that 
the marginal increment satisfies continually a 
higher or more intense want. 



CHAPTER VII 

SOCIAL PROSPERITY 

The prosperity of society is measured by the 
surplus utility which it can create in a given 
time. It is important that it be understood just 
what is meant by surplus as the term is here 
used. It is the designation of all that part of 
utility which remains after the costs of pro- 
ducers have been made good. It is, perhaps, 
easiest to see that the manufacturer, or the 
farmer, or the miner has left, after meeting all 
his expenses of production, a surplus product. 
Assuming that the manufacturer himself en- 
gages actively in the production as manager of 
the industry and as capitalist, it may be true 
that he does not have a surplus on every incre- 
ment of capital which he invests, or on every 
hour during which he labors. If we admit that 
the fatigue of the labor which extends far 
into the night is so great that the return only 
enables the manufacturer to regain his former 

112 



SOCIAL PROSPERITY II3 

position, there is at least for the earlier hours 
an equal or a greater return, and there is there- 
fore a surplus on the labor of those hours, in- 
creasing in amount toward the earlier hours of 
the day. His capital may be arranged likewise 
in a series of increments, each after the first 
bringing in a smaller return than the increment 
preceding it.^ Then even if we admit that 
there is just an even return on the last in- 
crement invested, there is still an increasing 
surplus on the preceding increments as we 
approach the investment which is most pro- 
ductive. 

The total surplus on manufactured goods 
does not appear, however, in the profits of the 
manufacturer. This total surplus is made up 
in part of items which enter into the manufact- 
urer's expenses. If he furnishes a part of the 
capital and is part owner of the land used by 
the industry, he is at one and the same time 
manufacturer, capitalist, laborer, and landlord, 
and in each capacity adds something to the 
total surplus. But those parts of the surplus 

1 Clark, " Distribution as Determined by a Law of Rent," in 
Quarterly Jotirnal of Economics for January, 1892. 

I 



1 14 ECONOMICS 

contributed by the capital, labor, and land of 
other persons appear on the manufacturer's 
accounts as items of expense. It is precisely 
the same to the manufacturer, so far as the 
particular transaction is concerned, whether 
the wages paid out by him are needed by 
the laborer to reimburse actual labor costs, or 
whether they are partly surplus enjoyed by the 
laborer. Thus, the surplus incomes enjoyed 
by the capitalist who loans to the manufacturer, 
by the landlord who rents his land, by the la- 
borer who works for wages, are all properly 
counted as expenses of manufacture, but they 
are not costs to society. Before we can deter- 
mine the social cost of a given quantity of 
commodities, we must trace back through the 
complex processes of production the actual 
productive exertions of the different classes of 
producers, disregarding the expenses of him 
whom we call the manufacturer, because those 
expenses are made up of many items which 
may or may not be costs ; but, on the other 
hand, counting his costs, and those of all other 
producers. 

We thus ascertain one of the two elements 



SOCIAL PROSPERITY II5 

necessary to a correct estimate of national pros- 
perity. Over against this cost we are to place 
the other element, the total utility of the com- 
modities produced. The difference between 
these is the social surplus, or the real measure 
of prosperity. It is a mistake to suppose that 
this social surplus can be increased only by 
methods which increase both costs and utilities, 
or that there is an invariable relation between 
the increase of utilities and the increase of 
costs. At any given time, in a given stage of 
progress, there may be such a relation, but it is 
modified by many causes which are continu- 
ously in action. Every such cause that modi- 
fies the relation favorably, enabling greater 
utility to be produced at the same cost, or the 
same utility at a less cost, increases the social 
surplus. Among such causes may be named 
the discoveries which place the natural forces 
more completely at the disposal of society, 
the accumulated results of past civilization, in- 
herited capital and knowledge, and inherited 
industrial qualities.^ The fact that there has 
been such a change in the relation of cost to 

1 Patten, Dynamic Economics, p. 51. 



Ii6 



ECONOMICS 



utility has been frequently obscured by the 
unequal distribution of the newly created utili- 
ties. Leaving aside for the present all con- 
sideration of how the wealth at the disposal 
of society is distributed, it is apparent that the 
social utilities are vastly increased by causes 
which do not involve any increase of costs, but 
rather tend to lessen them. 



B B' B" 



Fig. I. 



Figure I. represents the social utilities, the 
total number of pleasure-giving commodities at 
the disposal of society at any given time. It 
may be regarded as made up of an indefinite 



SOCIAL PROSPERITY 11/ 

number of parallel vertical lines like AB, A'B\ 
A'' B" J . . . DC, diminishing in length toward 
the right. This figure corresponds to the 
scale of diminishing utilities of Chapter V./ 
and the commodity AB may be assumed to 
have ten units, and DC eight units, all other 
commodities ranging between these limits. It 
will be noticed that the number of commodities 
is measured by the length of the line BC, the 
intensity of the pleasure conferred by the length 
of the vertical lines. As additional commodi- 
ties are consumed, BC is lengthened, and new 
vertical lines, shorter than DC, are erected. 
The scale previously given represented the 
consumption of an individual consumer, while 
this figure represents social consumption. In 
both instances commodities are arranged in the 
order of their surplus of utility over the expense 
to the consumer of securing possession of them. 
Figure II. represents the social costs of pro- 
ducing the commodities represented in Figure I. 
The line BC is identical in the two figures, 
standing in each case for quantity. The verti- 
cal lines FBy F'B', . . . EC show the cost of 
1 P. 87. 



ii8 



ECONOMICS 



producing the different commodities. They do 
not show the expense to consumers, but the 
actual costs, the pains of production. In each 
figure the vertical lines represent the impres- 
sions made on the feelings of human beings, — 
in Figure I., the feeling of pleasure from con- 
sumption ; in Figure II., the feeling of pain 
from production. The vertical lines of Figure 




Fig. II. 



II. increase in length toward the right, because 
the producer's cost steadily increases as a larger 
number of commodities are produced in a given 
time. Taking the day as the unit, it is suffi- 
ciently evident that the pains of production 
steadily increase as the length of the day is 
prolonged. The goods first produced by society 
have the greatest utility, they have also the 
least cost. The first few hours of labor in the 



SOCIAL PROSPERITY 



119 



day may have scarcely any actual cost to the 
producer, the fifth hour becomes burdensome ; 
by the eighth hour, all the more intense wants 
being satisfied, and the fatigue becoming great, 
the producer doubts whether further labor will 
be of any advantage; and by the ninth hour, 
that which can be produced having compara- 
tively little utility and entailing heavy cost, pro- 
duction for the day ceases. 
A 




Fig. III. 

When these figures are combined as in Figure 
III., the resulting surplus is clearly shown. 
Even the earliest utilities are represented as 
having a certain cost, FB, though in excep- 
tional cases that cost might disappear, in which 



120 ECONOMICS 

cases F would coincide with B\ and even the 
latest utilities are represented as having a cer- 
tain surplus, DE, though this also might dis- 
appear, in which case E would coincide with D. 
Now, the prosperity of society is indicated by 
the size of the area A FED. Prosperity is in- 
creased by anything which increases this area. 
Errors would probably be made if it were at- 
tempted to extend the vertical lines shown in 
Figure I. through the cost area of Figure III. 
The particular commodity of which the cost is 
FB might not have a surplus AF\ but the line 
BC oi Figure III., like the corresponding lines 
of the preceding figures, does represent all com- 
modities, the whole area ABCD does repre- 
sent their utility, and that part of this area 
which is below the slanting line FE represents 
their cost. The object of the discussion on 
which we are entering will be better understood 
if the relations expressed by these areas are 
kept constantly in mind. Prosperity is increased 
either by increasing the area of the quadrilateral 
AC, or by lessening that part of it which makes 
up the quadrilateral EC. 

The theory of prosperity then requires an 



SOCIAL PROSPERITY 121 

examination of the various means by which the 
social surplus is increased. Those means relate 
either to the increase of utilities or to the reduc- 
tion of costs. So far as they relate to the 
increase of utilities they may be classed as fol- 
lows : increase in variety of consumption ; sub- 
stitution of positive utilities for such absolute 
utilities as had been negative or neutral; so- 
cializing of consumption ; cooperation of con- 
sumers to secure greater pleasure ; the formation 
of harmonious complements ; and such modifica- 
tions of consumption as shall permit the utiliza- 
tion of new resources. The following examples 
will be noticed of the means by which social 
surplus may be increased so far as this can be 
done by a diminution of costs: division of labor; 
territorial division of labor; organization of in- 
dustry ; improvements in transportation ; in- 
crease of capital; increase in the productivity 
of land ; changes in the distribution of popu- 
lation ; invention ; hereditary transmission of 
industrial qualities ; education and industrial 
training ; growth of moral qualities. 

First among the means of increasing the 
utilities which society may obtain from the envi- 



122 ECONOMICS 

ronment with a given expenditure of effort is 
the increase in variety of consumption which 
naturally follows the reduction of the appetite 
for particular commodities. This tendency has 
already received attention in connection with 
individual consumption. But there is a social 
gain which is greater than the gains to individ- 
ual consumers. When there is no diversity of 
consumption, and but few commodities are de- 
sired, all consumers necessarily demand the 
same things. But when diversity begins, all 
consumers do not modify their consumption in 
exactly the same way. The growth of new 
wants prevents the utilities from diminishing 
with the former rapidity, and when different 
consumers develop dissimilar wants, a com- 
modity may satisfy a high want for one class of 
consumers, though it is capable of satisfying 
only a low want for other consumers, or it may 
have for them no utility whatever. Commod- 
ities are brought above the margin of consump- 
tion because new uses are found for them, or 
because the wants which they are calculated to 
satisfy increase in intensity. The surplus on 
other commodities is increased by the same 



SOCIAL PROSPERITY 1 23 

process, and the entire social surplus is thus 
enlarged. 

The consumption of the individual is im- 
proved, as we have seen, by the substitution of 
commodities which confer positive pleasure, — 
while they at the same time prevent suffering 
or preserve life, — for those commodities which 
could perform only the latter function. This 
substitution goes on in society with great ra- 
pidity because of the interchange of experiences. 
Since consumers have many qualities in com- 
mon, the union of consumers in society gives 
additional intensity to this force which is oper- 
ating to increase surplus utility. Practically, 
almost every important discovery becomes, soon 
after it is made, the common property of all 
civilized men, and the social process of eliminat- 
ing absolute but negative utilities becomes thus 
one of the most obvious methods by which the 
social surplus is increased. 

The socializing of consumption ^ is a term ap- 
plied to the process by which those forms of 
consumption are extended, which include other 

1 An excellent expression suggested by Professor Smart, in 
Annals of American Academy, November, 1892, p. 34, 



124 ECONOMICS 

persons than the original consumer in the bene- 
fit conferred. A Christmas dinner is given, for 
instance, to which many guests are invited. It 
must be assumed that the host derives from the 
meal a pleasure sufficient to compensate him 
for all the expenses incurred. It is even prob- 
able that, like other commodities, the dinner gives 
him a surplus of utility. In estimating the gain 
to society we must take into account not only 
this surplus to the host, but also the utilities 
enjoyed without expense by the guests. The 
Christmas dinner is typical of a large and in- 
creasing class of pleasures. A costly work of 
art may, if consumption be sufficiently socialized, 
give pleasure to thousands beside the owner. 
Thoreau " owned " all the desirable farms near 
Concord, because he could not be prevented 
from getting that kind of enjoyment from them 
which he most highly prized. Perhaps the 
widest scope for socialized consumption lies in 
the enjoyment of natural scenery, since it is 
difficult for the owner, even if he desires, to 
exclude others entirely from the view of a 
mountain, a lake, or a wood. To a very great 
extent, however, even this has been done, and 



SOCIAL PROSPERITY 12$ 

there is no loss to society more indefensible and 
unjust than that which comes from exclusive 
consumption of those commodities that are 
calculated to give pleasure to large numbers of 
people. Society may directly increase its sur- 
plus, without increasing the quantity of material 
commodities, by all those changes which make 
consumption social rather than exclusive. 

Somewhat different from the foregoing is the 
tendency of consumers to choose those forms of 
wealth which are possible only when the social 
instincts are sufficiently developed to permit 
the union of many persons in a common pleas- 
ure. For many, the family is the only recog- 
nized social unit for purposes of consumption. 
It is fully realized that within the family the 
common enjoyment increases rather than de- 
creases the pleasure-giving power of the com- 
modities. That which from one standpoint 
might be looked upon merely as a disagreeable 
necessity, becomes, with the development of the 
love of family and kindred, a source of enjoyment. 
Under the tribal system the social unit for con- 
sumption is a much larger one, and even under 
the guild system the unit commonly included, 



1 26 ECONOMICS 

together with the master's family, a number of 
journeymen and apprentices. It is doubtful 
whether there has not been a social loss by the 
economic changes which have accompanied the 
breaking up of these larger units and the in- 
troduction of the present system, in which the 
prevailing unit is the small family, and, if unmar- 
ried, the individual consumer. But in highly 
developed society a new tendency is seen to be 
operating toward the forming of social units for 
the consumption, not so much of the necessaries, 
as of the comforts and luxuries of life. The 
school, the university, the church, the theatre, 
the railway, and the public highway are regarded, 
by some whose primitive instincts are strong, as 
an unavoidable evil, only to be submitted to as 
substitutes for private drives, family tutors, 
privately engaged musicians, etc., because the 
latter pleasures are put beyond reach by their 
expense. That this is not the universal view, 
however, is apparent from the preference shown 
for the cooperative forms of consumption by 
many who are above considerations of expense. 
The boy who is to be the future German em- 
peror is taught, like any German youth, in the 



SOCIAL PROSPERITY 1 27 

public gymnasium and in the University of 
Bonn. The wealthiest man does not refuse 
the public service for the transportation of his 
letters. He has his box in the public opera and 
his pew in the public church. 

These two tendencies toward the socializing 
of consumption, i.e.^ the increase of those forms 
of consumption that involve some benefit to 
others than the one who selects and pays for 
the commodity ; and cooperation in consump- 
tion, i.e., the increase of those forms of consump- 
tion that rest upon the willingness of man to co- 
operate with others in a common expenditure, — 
are tendencies which mark the more advanced 
stages of social progress. It should be pointed 
out that but very little consumption belongs as 
yet in either of these two classes. Individual 
instances, like those cited, are not rare, but the 
greater part of our consumption is unfortu- 
nately selfish, exclusive, and unsocial. The loss 
to society from this source is very great ; or, to 
state the same fact in the more hopeful way, 
the possibilities of increasing the social surplus, 
and hence the general prosperity, from this 
source, are very great. 



128 ECONOMICS 

If it be true that the individual consumer 
may greatly increase the utility of the com- 
modities which he consumes by such combina- 
tions as produce harmonious effects, there is 
here a further means by which the social sur- 
plus may be increased. The special field cov- 
ered by the application of this principle to 
social surplus is the large field of socially con- 
sumed commodities, — not merely the streets, 
sidewalks, street-cars, railways, hotels, theatres, 
etc., but also such commodities as the news- 
paper, the lecture, and the gas and water supply, 
the common peculiarity of all being that they 
are desired by a large number of people at 
about the same time and in about the same 
form. The formation of complements among 
these commodities is no less marked than in 
individual consumption. To the increase of the 
social surplus in this way must be added the 
increase of utility secured by the individual 
consumer from the complements which he 
forms. The increase of prosperity from wiser 
and more economical consumption has in many 
directions greater possibilities than have yet 
been recognized, and many of these lie within 



SOCIAL PROSPERITY 1 29 

the scope of this principle : that the utiHty of a 
group may be enhanced by such change in its 
composition as shall displace discord by har- 
mony, and produce a more perfect synthesis. 

Many of the modifications of consumption 
which are pronounced by the economist to be 
desirable changes are so because the direct 
effect of the changes upon the feelings is such 
as to produce greater sensations of pleasure. 
More intense wants are satisfied with a given 
effort after the change than it was possible to 
satisfy before. Other changes in consumption 
are deemed desirable, not because they produce 
such direct effect, but because of peculiar con- 
ditions attached to the productive resources or 
agencies. The social surplus may be increased 
by such modifications of consumption as permit 
a fuller utilization of resources already some- 
what drawn upon, and the utilization of new 
resources. This principle, though not of greater 
significance in the long run than the principles 
already developed, is of even greater immediate 
importance for the American economist, since 
there are here enormous resources which remain 
undeveloped, not because there is a lack of 



130 ECONOMICS 

labor or capital to develop them, but because 
demand is not of such a character as to warrant 
the new product being brought to the markets. 
The woollen cloth with rough finish which re- 
cently became popular for business and even 
for professional suits, is made from the longer 
and somewhat coarser wool which can be pro- 
duced in this country. It is no less durable 
and no less attractive, when people have become 
accustomed to its appearance, than the smoother 
finish of the woollens which were formerly ex- 
clusively worn. The increased consumption of 
this less expensive cloth becomes therefore a 
good example of the creation of utilities by 
simple changes in consumption. When those 
changes are far-reaching and affect a whole 
country they may increase materially the social 
surplus. The extent to which the general well- 
being may be increased by economies of con- 
sumption is seldom realized more vividly than 
by those who observe closely the changes in 
consumption in periods of general depression. 
Changes in consumption become the means of 
preventing much positive hardship. Commodi- 
ties are made to *' go farther," that is to say, 



SOCIAL PROSPERITY 



131 



their utilities are increased. But if similar 
economies were practised in more prosperous 
times, the social surplus would be permanently 
increased. All changes which act upon general 
well-being by making commodities "go farther" 
than they previously did, act upon the social 
surplus by increasing the total utilities of the 
commodities produced. 




Fig. IV. 



An increase of the social surplus in any of 
the ways already described is indicated by the 
modifications of Figure III. shown in Figure IV. 
Starting with the conditions as they exist at the 



132 ECONOMICS 

beginning of the working day, the area ABCD 
may be increased by anything which increases 
the utiHty of the commodities consumed. The 
cost line retains its position, but utiHties, instead 
of diminishing rapidly from AB to DC, remain 
more nearly equal, the marginal commodity ris- 
ing on the first improvement in consumption 
from DC to GC, and later to HC. The surplus 
utility of the last commodity increases from DE 
to GE, and then to HE. The effect of this in- 
crease of the surplus, though the fact is not 
shown in Figure IV., would undoubtedly be to 
extend the line BC That is, the increased sur- 
plus would become an increased incentive to 
production, and more commodities would be 
produced. The gain, therefore, from improve- 
ments of the kind which have been noted is not 
fully shown when only the increased surplus on 
the commodities consumed is pointed out. The 
relative surplus on the additional commodities 
produced would not be greater, because costs 
would continue to increase, but the absolute 
surplus would be thereby increased. 

But this surplus area may be increased in the 
manner indicated in Figure V. Total utilities 



SOCIAL PROSPERITY 



33 



remain unchanged, but costs are reduced. 
Anything which checks the tendency toward 
the increase of costs operates as directly on the 
increase of the surplus as do the forces which 
check the tendency toward diminishing the 
utilities. Beginning with conditions repre- 




FlG. V. 

sented by the area FBCE, identical with the 
area described by the same letters in Figures 
II., III., and IV., the cost line can be forced 
down by improvements in the productive pro- 
cesses to FT, and finally to FJ. By each of 
these changes the area representing surplus 



134 ECONOMICS 

utilities is increased. The surplus on the last 
commodity produced grows greater and is rep- 
resented by the distances, DE, DI, and DJ, at 
the different stages. These changes would 
also have an effect upon the number of com- 
modities produced. The increased incentives 
introduced by the reduction of costs lead to 
further production, and the line BC is ex- 
tended. The limit of extension for this line is 
the place at which the cost line and the utility 
line would intersect. D and E may coincide, 
but the line EC cannot be of greater length 
than the line DC. That is to say, a commodity 
will not be produced if its utility is not at least 
equal to its cost. 

It is not necessary to discuss in detail all the 
various forces which operate to increase social 
surplus by reducing costs, because, though they 
logically demand attention at this place, some 
of them are sufificiently well known to be re- 
garded as commonplace. They are nevertheless 
of sufficient importance to require brief mention. 
Most prominent among these various phases of 
industrial progress is the extension of the prin- 
ciple of the division of labor. This is preemi- 



SOCIAL PROSPERITY 1 35 

nently a principle which springs from social 
relations. The chief advantage of the division 
of labor is that each producer may devote him- 
self to the particular tasks for which he is fitted 
by nature and training. Since under the divis- 
ion of labor one does not consume the products 
of his own labor, but exchanges those products 
for the commodities which he desires, he may 
disregard his consumption when deciding to 
what occupation he shall devote himself. So 
much would follow upon a mere division of 
trades, by which is meant the separation of pro- 
ducers into those who produce farm products, 
those who produce shoes, those who produce 
clothing, etc., etc. 

There is, however, a further division of em- 
ployments within these separate branches of 
industry. In a large manufacturing establish- 
ment the different processes in the production of 
a commodity are, under a more minute division 
of labor, assigned to different classes of work- 
men. No one produces an entire commodity 
which he can exchange for the commodities 
needed for his own consumption, but each re- 
ceives certain raw materials or certain partly 



1 36 ECONOMICS 

finished commodities, performs on them certain 
operations for which he is especially trained, 
and passes them on to another producer 
who does likewise. In a stove factory, for in- 
stance, one man must spend his time in grinding 
the " edges " used in ornamentation. The work 
is monotonous, yet, compared with other occu- 
pations, the work of edge-grinder demands con- 
siderable skill and offers considerable variety of 
bodily exercise. Industrially, a division of labor 
as minute as the market for the product will 
permit is a gain — offset at times, however, by 
physical injury to the individual worker. Greater 
skill, precision, and speed are gained when the 
number of operations which the laborer is com- 
pelled to learn is made as small as possible. 
Work is distributed in accordance with the 
endowments of the laborer, and the acquire- 
ment of a high degree of skill is made possible. 
By the extension of the division of labor the 
social cost of producing a given quantity of 
commodities is reduced. 

The territorial division of labor is advanta- 
geous, but it rests upon a somewhat different 
basis. Each part of the earth is better suited 



SOCIAL PROSPERITY 1 37 

to the production of some commodities than 
to the production of others, and if in each dis- 
trict attention is paid to the pecuHar quahties of 
that district, and there is corresponding increase 
of exchange, the total cost of producing the 
commodities desired will be lower than if it is 
attempted to produce commodities where the 
natural conditions are unfavorable. Every judi- 
cious extension of the territorial division of labor, 
whether between countries or between different 
sections of the same country, tends to reduce 
costs. 

By the organization of industry is meant not 
merely the separation of producers into trades 
and into minute portions of trades, but, further, 
the bringing together of the various productive 
agencies in such a way that they become really 
operative and efficient. It is the name applied 
to a series of positive actions. A farmer, by 
years of saving, succeeds in getting control of a 
certain amount of capital, or he borrows from 
some one who has saved it the capital he needs ; 
selects a farm suitable to the crop which he ex- 
pects to raise, and within reach of his market ; 
he employs the necessary laborers, he purchases 



138 ECONOMICS 

the necessary implements, he chooses the seed 
that is to be planted, he directs how much labor 
shall be put on each field, how many times the 
corn shall be ploughed, what fences shall be 
built, when the crop shall be harvested, where it 
shall be offered for sale, — in a word, he organ- 
izes industry. With the extension of the division 
of employments the organization becomes more 
complex, but the division and the organization 
are not identical. The organization may be very 
highly developed in industries which, from their 
nature, do not allow a minute division of labor, 
and the organization may be very weak at cer- 
tain points, though a thorough division of labor 
has been introduced. Those improvements in 
the organization of industry which prevent mis- 
applications of capital or energy materially 
reduce the costs of production. As the organiza- 
tion of industry becomes more intricate it be- 
comes at times more sensitive, and a reduction of 
costs may often be secured by such changes in 
the forms of organization as shall secure more 
perfect insurance against loss. 

Improvements in transportation lower costs 
by permitting an extension of the territorial 



SOCIAL PROSPERITY 1 39 

division of labor, by permitting laborers to 
get easier access to new productive resources, 
and in other obvious ways. Few other 
mechanical discoveries have lightened the 
costs of production to so great a degree as 
the improved methods- of transportation which 
have come into general use during the pres- 
ent century. 

The increase of capital at the disposal of 
society greatly facilitates production. Costs 
are reduced when capital is inherited, the 
quantity of capital b^ing increased by the 
accumulations of successive generations. 
The growth of the saving instincts makes the 
accumulation of capital continually easier in 
a progressive society. Each generation adds 
to the stock of relatively imperishable goods, 
and each generation becomes more able to 
retain the utilities of perishable goods by con- 
tinued reproduction. The effect of this growth 
of utilities is particularly noticeable in the 
case of land. Each generation, under good 
methods of cultivation, makes the land more 
productive than it found it. Permanent im- 
provements are made, the rotation of crops 



140 ECONOMICS 

suited to particular lands is discovered, methods 
of fertilizing are improved, the growth of 
population steadily enhances the utility of 
particular tracts. In these ways the pro- 
ductivity of land is increased, that is, the 
quantity of labor required to produce a given 
number of commodities is reduced. Both 
the increase of capital and the increase of the 
productivity of land are powerful agencies in 
the reduction of social costs. 

By changes in the distribution of popula- 
tion which shall prevent unnecessary trans- 
portation and manufacture ; by invention ' of 
new processes ; by the hereditary transmission 
of industrial qualities originally acquired, it 
may be, at great cost; by improved methods 
of education and industrial training; and 
finally by the growth of such moral qualities 
as love of home and country, industriousness, 
and energy, — by all these, and other means 
that will occur to the reader, the costs of 
producing the commodities which are de- 
manded by society are very much reduced. 

These two kinds of progress, which have 
been distinguished as social and industrial. 



SOCIAL PROSPERITY 



141 



are in reality closely combined, and interact 
upon each other. Wise changes in consump- 
tion directly increase utilities, but they also 
influence industrial progress favorably. Figure 
VI. exhibits the modifications of the social 
A 



— ^^ 

D 
E 



C 



Fig. VI. 



surplus area necessary to indicate the union 
of social and industrial progress. Both the 
line AD and the line FE tend toward the 
horizontal, the one forced upward at D by 
social progress, the other forced downward at 
E by industrial progress. The area A FED is 
enlarged at the second stage of progress to 
AFIG, and at the third stage to AFJH. 
Prosperity is increased by the twofold pro- 



142 ECONOMICS 

cess of increasing utilities and decreasing costs. 
The line BC is extended to BC\ and then 
to BC^\ because under the new incentives 
more commodities are produced. The total 
costs, after production is thus extended, are 
greater than before, but the relative costs are 
much less because of the increase of utilities, 
and the surplus utility on each commodity is 
made greater. The inducement of society to 
produce lies in the amount of this surplus ; 
and in the increase brought about by the 
joint action of the two sets of tendencies, 
grouped under the very general terms indus- 
trial and social progress, are to be found the 
springs of that irresistible impulse to intense 
industrial activity which is so characteristic 
of modern society. 



CHAPTER VIII 

THE STANDARD OF LIVING 

The standard of living is a collective term 
for the necessaries, comforts, and luxuries which 
are within reach at a given time, and which are 
so related to each other that none can be 
dropped without lessening the amount of pleas- 
ure to be obtained from the others and so 
checking general prosperity. The standard of 
living directly determines, not only wages in 
the narrower sense, but all forms of personal 
income, except those which, like interest on 
inherited capital, are fixed almost solely by 
causes external to man's personal activity. 
The income of an individual producer is deter- 
mined in some instances by the standard of 
the class of producers to which he belongs, 
rather than by his own personal standard. 
This is particularly true in the case of pro- 
ducers who have no capacity for initiating new 
enterprises and for acting independently of 
143 



144 ECONOMICS 

the cooperation of their fellows. Without 
entering further into questions of distribution, 
it may be admitted that other causes unite with 
the standard of living to cause high or low 
wages, though there is no other influence so 
powerful or direct in determining whether 
income shall be great or small; and it may 
be admitted that the effects of the standard 
of living are more immediate and obvious in 
the case of the more intelligent and energetic 
producers, though a modification of the stand- 
ard is essential to any permanent improvement 
in the economic condition of even the most 
helpless and degraded classes. 

If to the standard of living is to be assigned 
so important a function as is implied in class- 
ing it foremost among the influences which 
determine income, and thus determine what 
degree of prosperity is to be enjoyed, it be- 
comes a clear duty to ascertain how the stand- 
ard itself is determined. The standard is high 
if it includes a relatively great variety of com- 
modities ; if these commodities satisfy intense 
wants so that their utility is relatively great; 
if the relations established among the commod- 



THE STANDARD OF LIVING 1 45 

ities have become so intricate, and the bonds 
connecting them to each other so numerous, 
that every commodity is held in the standard 
by the greatest possible number of separate 
associations. But what conditions are favor- 
able to this greater variety, higher utility, and 
more intimate association ? The answer is 
found in certain of the primary laws of con- 
sumption already developed. 

All those commodities will be included in 
the standard of living which have as great a 
surplus of utility over cost as the original food 
supply has at the same time. If we crave an 
object as the hungry man craves food, we are 
equally sure to get it. Commodities are chosen 
in the order of their surplus utility. Even in 
the earliest stages of social development several 
articles of food will be chosen because they are 
imperatively demanded by the system. The 
beginning will be made with those articles 
which can be produced at the lowest cost. 
Utility is uniform because the tastes are not 
sufficiently developed to permit any great pref- 
erence for one commodity over another, while 
differences in cost are so marked that the 



146 ECONOMICS 

relative amount of surplus utility is determined 
almost solely by these differences. In cold 
countries one or two articles of clothing will 
be urgently desired for similar reasons. The 
standard includes simply the few articles of 
food and clothing that have the highest surplus 
utility. The standard will be low, i.e., but few 
necessaries, scarcely any comforts, and no lux- 
uries will be enjoyed, because in the economic 
order of consumption there are a few commodi- 
ties which have a large surplus, all other com- 
modities having little or no ' surplus, because of 
their low utility, or more frequently because of 
their high cost. The first imperative condition, 
therefore, of an improvement in the standard 
of living is a modification of the economic 
order of consumption. 

In the propositions concerning consumption,^ 
the different methods in which the economic 
order of consumption is modified were indi- 
cated. The method which would obviously 
come earliest into operation is the one first 
enumerated, a change in the relative cost of 
producing different commodities. Any change 

1 Chapter VI. 



THE STANDARD OF LIVING 1 47 

which would bring a commodity of equal utility 
nearer to the cost level of the articles already 
in the standard would be a favorable condi- 
tion to an increase in variety. A change in 
appetite affords a condition quite as favora- 
ble, if it reduces the undue surplus on articles 
already consumed by a decrease of appetite, 
or if it increases the number of commodi- 
ties available by the opposite process of bring- 
ing the utility on a new commodity far above 
its cost. After the change in appetite it is 
found that some new article of food satisfies 
so keen a taste that its high cost is no longer 
an obstacle to its entering the standard. 
More common than either of these simplest 
processes is the more complex process of the 
formation of new complements by the sub- 
stitution of positive for negative or neutral 
utilities, the elimination of discordant ele- 
ments, changes in the imputation of utility. 
The standard is improved when that which 
gives pleasure is substituted for that which 
had been used from necessity, having cost as 
much, but having been incapable of afford- 
ing any positive degree of enjoyment. Each 



148 ECONOMICS 

hour's labor devoted to the production of 
the new commodity yields a greater return 
than before. There is now additional motive 
for undertaking the labor. The standard is 
higher, and income is correspondingly in- 
creased. 

Every stage of social progress is marked 
by the transformation of luxuries into neces- 
saries. In a progressive society luxuries are 
those commodities which stand in the outer 
court about to enter the standard of life.^ 

Mention has already been made of the 
natural tendency to attribute most of the 
pleasure derived from a group of commodi- 
ties to those elements last added to the con- 
sumption. These are the elements that are 
vaguely termed luxuries. Unpleasant asso- 
ciations cluster around the more primitive 
pleasures. The consumer is strongly inclined 
to satisfy his needs without resorting to the 
commodities which he once enjoyed, but now 

1 Luxuries are defined by Professor Patten as articles that 
the civilized man must have to keep disagreeable associations 
from destroying the utility of necessaries ; Dynamic Econom- 
ics, p. 131. 



THE STANDARD OF LIVING 1 49 

detests because of the changes in himself. 
This desire to avoid disagreeable associations 
leads to a keener appreciation of the pleasure 
to be derived from a complement from which 
they are entirely absent. The new commodi- 
ties are made to enter the standard with a 
high degree of utility imputed to them, be- 
cause they enable the consumer to receive 
the full effect of pleasant impressions and to 
avoid the disagreeable associations if they 
exist. The new standard may have greater 
or less expense than the old. If it has less, 
there will be a direct motive to improve it 
still further. If the expense of the new 
standard be greater than that of the old, the 
consumer will not throw out the new articles, 
but will strive to increase his productive power ; 
or, failing that, will, either, by limiting the size 
of his family or in some other way, set causes 
at work which will ultimately cause a complete 
readjustment of society to the new standard. . 

To recapitulate : If the economic order of 
consumption is such that a few articles are used 
practically to the exclusion of all others because 
of their low comparative cost, then a change in 



1 50 ECONOMICS 

the economic order of consumption is an imper- 
ative condition of any improvement. Until 
other things are as cheap as rice in India, as 
the potato in Ireland, as Indian-corn bread and 
bacon in some sections of our Southwestern 
States, the standard of diet in those places will 
be low. Let a number of articles have nearly 
the same degree of surplus over cost, and the 
first favorable condition is secured. If social 
changes then effect a decrease of the intenser 
appetites, the increase of variety is assured. 
The articles before consumed can no longer be 
taken in large quantities, and when productive 
power is increased or new economies introduced, 
the tendency will be to choose the new com- 
modities which, by the modification of the eco- 
nomic order of consumption, are brought within 
reach of the consumer. The standard of life 
includes those articles only which are brought 
above the margin of consumption by such 
changes as give them a surplus equal to the sur- 
plus on those articles of food, shelter, and cloth- 
ing which are ranked among the necessaries of 
life. 

To the student who is unaccustomed to the 



THE STANDARD OF LIVING 151 

technical terms of economic discussions, but is 
interested in the practical problem.s of consump- 
tion and production, even such elementary ex- 
planations as are contained in the foregoing 
paragraphs may seem to be too formal and 
theoretical for application to actual conditions. 
The doctrines that income is fixed by the stand- 
ard of living, that increase in the variety of 
consumption is conditioned on a decrease of the 
intenser appetites, that the utility of a group is 
greater than the sum of the utilities of its mem- 
bers, that progress is secured by the gradual 
substitution of new complements for the older 
and less harmonious complements, — doctrines 
which are deduced from the fundamental and 
sufficiently well-established facts revealed by in- 
ductive study of human society, — are yet too 
unfamiliar for them to seem concrete and real. 
They are, however, in close harmony, so far as 
their practical application is concerned, with 
those teachings which are instinctively recog- 
nized as sound even when unfortified by eco- 
nomic or philosophical reasoning. 

A decrease in the cost of commodities, a 
discovery of some new mechanical process, a 



152 ECONOMICS 

change in the habits of consumers, make pos- 
sible a higher level of living for all who have 
an assured income of stipulated amount. Will 
the income now be reduced to correspond with 
the cheaper cost of living, or, will the advan- 
tage of the change be retained by the general 
body of consumers ? For nine-tenths of the 
world this is a momentous question. The ad- 
vantage will be retained if the standard of 
living is modified, not otherwise. Unless the 
pleasures which are now brought within reach 
are bound to each other by a multitude of new 
associations, and the whole consumption ad- 
justed to the new conditions, its advantages will 
slip away into the hands of shrewd monopolists 
and unscrupulous dealers. Better choice of 
food, abstinence from stimulants, a heavier 
demand for suitable clothing, an insistence on 
ample housing facilities, are essential elements 
in the improvement of the standard. Not less 
important than these is such education and 
training as shall enable the consumer to judge 
more accurately of the value of the simpler 
works of literature, music, and art. *' It is not 
a question simply of choosing the good instead 



THE STANDARD OF LIVING 1 53 

of the bad, but of choosing the best instead of 
the good." 

The person who is without any canons by 
which to judge of a picture, or a musical per- 
formance, is deprived of a large part of the 
benefit which he might get from even a small 
income, and is deprived of that barrier which 
might have prevented a reduction of his income 
to the level of actual necessaries. The con- 
sumer who sees no difference between trivial 
doggerel and the literary masterpiece is at a 
distinct disadvantage of the same kind as that 
under which the laborer is placed who uses but 
a single article of diet and has in his wardrobe 
but a single dilapidated suit. Those consumers 
whose ideals are high, whose tastes are devel- 
oped harmoniously, and whose demands call 
for a wide variety of physical, mental, and social 
resources, will win a commanding place in the 
unconscious economic struggle which continu- 
ally goes on. Their income will be larger, 
their distribution fairer, their productive power 
greater. The considerations that have been 
presented have an interest not academic merely, 
but intensely practical and human. 



CHAPTER IX 

VALUE 

There are three distinct attributes of goods 
which are of fundamental economic importance : 
their utiUty, their value, and their cost. Refer- 
ence has already been made to the first and 
third of these attributes. We are new in posi- 
tion to consider the character of value, and the 
laws which determine its variation. 

By the value of a commodity we mean its cost 
to the consumer, its power in exchange, the 
measure of its effective utility, its full impor- 
tance to the society of which the individual 
owner, or would-be purchaser, is an integral 
part. These several phrases, each of which 
may be regarded as an equivalent for the term 
"value," themselves demand explanation. Such 
explanations will throw light upon the real 
nature of value, and will enable us subsequently 
to formulate a satisfactory definition. 
154 



VALUE 155 

' The cost of a commodity to the consumer 
differs from its real or producer's cost, and gen- 
erally exceeds it. The real cost to society is 
the amount of physical or mental exertion, the 
loss of vitality, involved in its production. In 
describing the making of goods it was necessary 
to dwell upon some of the physical conditions 
of which man's economic activities must take 
account. Changes in those conditions are con- 
tinually modifying the relative costs of different 
commodities, making it harder to produce some, 
and easier to produce others. When the en- 
vironment as a whole becomes more favorable, 
the total cost to society may be reduced for all 
classes of goods, but not usually for all classes 
in equal degrees. It is conceivable that a wide- 
spread physical malady might so far reduce the 
vitality of all producers as to make the costs of 
production universally greater. When cost, in 
economics, is contrasted with utility, or with 
value, it is cost in this sense of producer's ex- 
penditure of energy that is meant. Cost in this 
sense is not the equivalent of value, and does 
not stand in any constant relation to it. 
Early economic theories attempted to base 



1 56 ECONOMICS 

value upon cost of production, but so many ex- 
ceptions have been found to every law which 
has been formulated in accordance with such 
theories, that the attempt has been all but 
abandoned. But consumer's cost is a different 
thing, and is, indeed, only another name for value. 
It denotes, not the actual cost of production, but 
rather the precise amount of some other com- 
modity that must be given up at any given time 
to secure or retain possession of the commodity 
in question. We may contrast consumer's cost 
with the real cost of production, just as we con- 
trast the latter with value. If the producer of 
any commodity, dealing directly with the con- 
sumer, finds himself, after selling the commod- 
ity, in precisely the same position as when he 
began the act of production, with only a suffi- 
cient remuneration to make good his actual loss 
of energy, then in that special instance cost and 
value, or, in other words, consumer's cost and 
real cost, are equal. But this is not the normal 
result of production and exchange. 

Value may properly be called power in ex- 
change, if it is understood that the expression 
does not imply any inherent power in the good 



VALUE 157 

which is valued. The reason why value came 
to be looked upon as power in exchange, is 
that, in the distribution of products, men are 
willing to interchange only goods of equal value. 
The value does not depend upon this fact. 
Value would exist even if there were no ex- 
change. It is even possible to find other exter- 
nal tests of value than this. The amount of 
value does not come from the ability of the pos- 
sessor to obtain in exchange such and such 
goods. This ability, on the contrary, is the 
effect of the value already existing in the good. 
The interchange of products is of enormous 
advantage to society, and the regulator of that 
process is the value of the products to be ex- 
changed; but the significance of value is even 
more far-reaching, and its origin lies elsewhere 
than in the market. Power in exchange is an 
equivalent for value only when value is being 
used to determine the relative quantities which 
either party to the exchange can afford to give 
up to the other. It does not exhaust the mean- 
ing of the word "value" and is therefore not a 
complete equivalent. 
'^ When we describe value as the measure of 



158 ECONOMICS 

effective utility,^ we reach a far more significant 
explanation of its real character. The utility of 
any commodity is its power to satisfy desire. 
Its effective utility is the extent to which the 
satisfaction of the desire is dependent upon the 
particular commodity. A glass of water has 
great utility if it quenches intense thirst ; but 
if, on the loss of a glass of water, another could 
be substituted without the slightest labor or in- 
convenience, its effective utility is zero, because 
the satisfaction of the want is not in the least 
dependent upon the possession of the particular 
glass of water which is actually used. If a 
favorite volume of poems yields to the reader a 
delight which he ranks high above ordinary 
pleasures, its utility is correspondingly great; 
but its effective utility is measured by the im- 
portance which he attaches to the volume in 
view of all the circumstances which have a bear- 
ing upon it, — the possibility of securing another 
copy, the possibility of substituting other poetry, 
or the possibility of turning his attention to 
other enjoyments of equal or nearly equal inten- 
sity. Effective utility is the term which de- 

1 Clark, Philosophy of Wealth, Chapter V. 



VALUE 1 59 

scribes the entire effect of any good upon the 
consumer's welfare. It includes its positive 
utility, with any necessary deduction for second- 
ary negative utility.^ Value is the measure of 
this effective utility. It is well to fix clearly in 
mind this conception of value, in order that its 
essential relation to utility may not be lost sight 
of in future discussions of the laws by which 
value is determined and distributed. 

The final phrase suggested at the outset 
as an equivalent for the value of a com- 
modity is its full importance to society. The 
standpoint is here changed from that of the 
individual to that of the total body of per- 
sons who might conceivably attach any im- 
portance to the commodity. It is yet too 
early to inquire by what method the estimate 
of society is ascertained ; but to guard against 
misapprehension we may say that the method 
is precise and invariable, and that it is not 
by taking an average of the various individual 
estimates, that the importance to society is 
determined. This shifting from the individual 
to the social standpoint is necessary thus 

1 See Chapter V. 



J 



1 60 ECONOMICS 

early in the explanation of value. All the 
various substitutes for the term "value" must 
frequently be understood in the social sense. 
Consumer's cost means the general cost to 
consumers, not that which an individual con- 
sumer may happen to incur ; power in ex- 
change throughout an entire market, not in 
an exceptional bargain which may fall to an 
individual producer ; measure of effective 
utility, not to an individual, but to society. 
Value would remain even if the possessor of 
goods were in complete isolation, and its 
laws would correspond to those which pre- 
vail in society. But unless by some quali- 
fying expression the sense is limited to an 
isolated individual, it is the value to society 
that is the object of investigation. 

Value can best be explained by reference 
to the law of diminishing utilities. It will 
be simpler to consider first the case of an 
isolated consumer in possession of a stock of 
commodities which for a definite period can- 
not be increased. To adopt an illustration 
already familiar in the discussions of value, 
suppose an isolated settler on a Western prairie 



VALUE l6l 

to be in possession of three cribs of corn, 
one to furnish food for his family until the 
next crop is gathered, a second to feed his 
team of horses, and a third for chickens and 
pigs, that he may have meat for the winter. 
The corn is of uniform quality. He has no 
other kinds of grain or other substitute for 
the corn. The three wants that are to be 
supplied by the corn are of very different de- 
grees of importance, but each is satisfied by 
one-third of the total supply. Since the 
utility of a good corresponds to the want 
which it satisfies, the utility of the first crib 
is almost beyond measure. The deprivation 
that would be experienced by an entire lack 
of grain for his own table would be intolera- 
ble. The utility of the second crib is some- 
what less immediate, ^but is still very great, 
since the team is indispensable in cultivating 
the crop of the following season. That of 
the third crib is much less, but considerably 
above zero. Regarding the crib as the unit, 
for convenience, we may represent the utility 
of the three cribs by the numbers lo, 5, and 3, 
respectively. The initial utility of corn to the 



1 62 ECONOMICS 

isolated settler under the circumstances de- 
scribed is lo. The final or marginal utility 
is 3. The total utility is 10 plus 5 plus 3, 
or 18. What now is the value or the effec- 
tive utility of any one crib ? and what is 
the effective utility or the value of the entire 
supply ? 

It is obvious that the effective utility or 
value of each crib is 3. No crib can be 
valued at more than 3 so long as there is a 
supply of three cribs. If the crib which has 
a utility of 10 is destroyed or sold, it is re- 
placed by one of the others, and the initial 
utility is not sacrificed. Notwithstanding the 
differences in the wants which they satisfy, 
the value of each is the same as that of the 
others so long as all are present, and the 
value of each is equal to the utility of the final 
unit. The value of the entire stock is easily 
ascertained by multiplying the value of each 
unit by the number of units. In the case 
under consideration the value of the stock 
is 3 X 3, or 9. 

It will be interesting to notice what happens 
if the settler by some accident loses one of 



VALUE 163 

his three cribs. He is no longer in position 
to supply all of the wants for which the three 
cribs would have provided, and he will natu- 
rally decide to do without the chickens and 
pigs, utilizing the two cribs for family use 
and as feed for his team. The initial utility 
is 10 as before ; the final utility is now 5. 
The total utility is 15. Since neither of the 
two cribs will be used to satisfy a less want 
than 5, and since neither of the two can be 
valued at more than 5 so long as they are 
interchangeable, the value or effective utility 
of each crib is 5, and the value of both is 
2 X 5, or 10. In this case a diminution of the 
supply has actually increased its value, though 
it has diminished the utility by 3. Value is 
derived from utility, but it does not equal it 
save in the exceptional case where initial and 
final utility are identical. If the settler had 
but one crib, or if the two wants satisfied by 
the two cribs were of equal intensity, the 
final utility would be equal to the initial 
utility, and the sum of utilities would be the 
value of the stock. Wherever utilities follow 
the ordinary law of a diminishing scale, it is 



164 ECONOMICS 

final utility, or the utility of the last incre- 
ment which the consumer is in position to 
enjoy, that is significant in determining value. 
In the illustration we have thought of a single 
consumer and of a single commodity. We may 
transfer this conception of final utility to the 
entire consumption of a typical consumer. 
There are many goods which he is in position 
to enjoy, and he will consume them in very di- 
verse quantities. Each good will begin with an 
initial utility somewhat higher than the margin 
of consumption,^ and will fall as its supply is 
increased until its final utility is similar to that 
of other commodities consumed. The last incre- 
ment of any article which the consumer thinks 
it worth while to possess has a utility lower than 
that of any previous increment, and this is known 
as the final utility of that particular commodity. 
At this point utility and value are equal. The 
utihty of this particular increment determines 
the value of the entire supply of that commodity. 
Each of the earlier increments has a value equal 
to the final utility, and the value of the entire 
stock is found as before by multiplying the final 

1 See Chapter V. 



VALUE 165 

utility by the number of units in the supply of 
the consumer. 

If in this way the value of all the commodities 
which fall within the margin of consumption is 
ascertained, their sum will express the aggregate 
effective utility of all the goods which at the given 
time the consumer has at his disposal. This 
would fall far short of the total pleasure or bene- 
fit which he will derive from their consumption. 
It will express only the extent to which his wel- 
fare is affected by the possession of these par- 
ticular goods — their cost to him as a consumer, 
their final utility, or their value. 

There is no reason why this summation could 
not be extended to cover the aggregate con- 
sumption of the entire community. Value is 
not merely a ratio, as has sometimes been said ; 
it is a sum of final utilities. The fact that final 
utilities are often compared for purposes of ex- 
change, and their relation expressed in price, 
which is a ratio, should not blind us to the fact 
that value is primarily a mental estimate of the 
importance of goods to human welfare ; and that 
we may think of, if not accurately calculate, the 
total importance of all the goods at the disposal 



1 66 ECONOMICS 

of society. Values, like utilities or costs, may 
rise and fall. Whether they will do either is 
determined by all the varying influences which 
affect either the wants of man, or the extent to 
which at any given time those wants are sup- 
plied. 

If consumers have but few wants, and those 
are satisfied almost to satiety, the goods which 
they consume will have little value as a whole, 
notwithstanding their abundance. The final 
utility, which is the multiplicand in determining 
the value of the supply of each article, is small, 
and the number of articles whose joint value is 
in question is also small. If a community has a 
great diversity of wants and is in position to 
satisfy each, even to a very limited extent, it 
will be in a more favorable position. The final 
utility of each article will be nearly as great as 
its initial utility, and the number of articles will 
be large. It is probable that the absolute 
amount of several of the articles which entered 
earliest into the consumption would also be 
great, as there is always considerable difference 
in the initial utility of different elements of the 
consumption, and large quantities of some of 



VALUE 167 

the more generally coveted commodities will 
be desired before any beginning is made on 
others. 

Industrial progress extends the productive 
power of society, enabling it to satisfy existing 
wants more fully. This process constantly 
lowers the final utility of the articles demanded, 
and the decrease in cost is roughly followed by 
a decrease in value. Social progress of the kind 
that elevates and diversifies human desires affects 
final utility in an opposite direction. It diverts 
the productive energies into new directions. 
The multitude of new desires crowd upon the 
older wants which were so fully satisfied, and will 
often prove to be of so great intensity that the 
consumer will sacrifice a portion of the older 
enjoyments to obtain the new satisfactions. 
Thus the scholar will go hungry or naked to 
secure a precious book or manuscript. This 
brings about a readjustment of the margin of 
consumption at a point which gives higher final 
utility to all commodities, and adds to the num- 
ber of commodities included. The value of 
each may be increased by the rise in its final 
utility, and their individual value is no greater 



1 68 ECONOMICS 

than before the total values are increased by the 
addition of new commodities. 

It has already become clear that an increase 
of values is not always an indication of increased 
welfare. The Western settler is not better off 
with two cribs of corn than with three, although 
he places nearly twice as high a value upon the 
two after one is destroyed, as he did upon any two 
of the three so long as he had them all. It is 
total utilities that limit welfare, not total values. 
But in determining the relative welfare of indi- 
viduals in economic society, value plays an im- 
portant part. The producer of wealth is chiefly 
interested in the value rather than in the utility 
of his product. A prominent inventor is said 
to have derived very little personal advan- 
tage from those inventions which have most 
contributed to human happiness, except that 
they have brought him personal satisfaction 
and renown. Minor inventions, of which the 
public has known comparatively little, have 
proved more profitable to him. Utility and 
value may, as in this instance, drift widely apart, 
and both may be far in excess of cost. . Con- 
sumers as a class are concerned that there shall 



VALUE 169 

be great utility and little value ; producers, that 
there shall be great value and little cost ; society 
as a whole, that there shall be great utility and 
little cost. 

We must now redeem the promise of an 
earlier paragraph to explain the method by 
which the social value, or, to adopt a more 
familiar expression, the market value, of a 
commodity is determined. The decisive factors 
are the supply of the commodity and its final 
utility to the last, i.e., the least eager, consumer 
who is in position to take any portion of it. 

Let us suppose that there are on sale in a 
given market twelve pairs of shoes, and that 
there are an indefinite number of persons who 
desire shoes, provided their value is not higher 
than the final utility of shoes to themselves. 
For the sake of simplicity it is assumed that 
all the shoes are to be sold, whatever they will 
bring ; in other words, that the present owners 
do not enter the lists in competition with 
buyers, but freely place all twelve pairs in the 
hands of a dealer with instructions to sell them 
all at the best rate which he can get. It will 
also be assumed that each purchaser desires 



1 70 ECONOMICS 

but one pair, and that the condition of con- 
sumers varies so widely that no two will find 
the same final utility in a pair of shoes. The 
first finds himself in urgent need of shoes, 
and their final utility to him is almost as 
great as their initial utility. If he could not 
otherwise find suitable covering for his feet, he 
would willingly go without a suit of clothes, or 
live in a cheaper house, to provide himself with 
shoes. The final utility of shoes to him we 
may represent by the number 24. Others 
among the possible purchasers attach less im- 
portance to them by differences which permit 
us to range their estimates consecutively from 
24 to I, there being a consumer for each inter- 
vening number. If there were but a single pair 
of shoes to be sold, it would bring 24. The 
duty of the dealer would be to find the pur- 
chaser for whom shoes have the highest utility, 
and to insist upon securing all that he is willing 
to give. In the case supposed, there are twelve 
pairs, and all are to be sold. It is therefore 
necessary that as many as twelve customers be 
supplied, since no one desires more than one 
pair. It is now the duty of the dealer to find 



VALUE 171 

the twelve customers for whom shoes have 
higher final utility than for any others, and the 
twelfth or last one to be brought into the bar- 
gain will be, according to the conditions as- 
sumed, a consumer for whom shoes have a 
final utility of 13. The aggregate of the final 
utilities enjoyed by the twelve consumers will 
be 222,^ but their market value will be deter- 
mined by the final utility of shoes to the twelfth 
purchaser. Since this is 13, the market value 
of shoes on the day of the sale will be 13, and 
the twelve pairs will bring 12 x 13, or 156. 
There is no method by which the dealer can 
make any purchaser, however urgent his need, 
pay more in the open market than the value of 
the last pair to be sold. 

If he does not care to dispose of the whole 
stock, but would rather reserve one pair than 
accept so low a price for it as 13, he can then 
disregard the estimate of the twelfth would-be 
purchaser just as he previously disregarded all 
lower estimates. The final utility which would 
then become operative is that of the eleventh 
customer, for whom shoes have a final utility of 
1 24-1-234-22 + 21 -f 20-1- 19-M8-I- 17-1- 16-I- 15 + I4H- 13 = 222. 



172 ECONOMICS 

14. The eleven pairs now to be sold will bring 
II X 14, or 154, nearly as much as was obtained 
for the twelve pairs. In the actual course of 
business it is often found that the total value 
of a stock is increased by the withholding of a 
small part of the supply. The reason is that 
a larger multiplicand is obtained by the rise in 
final utility. 

The only modification of this account of the 
process by which market values are determined 
necessary to make it fit the normal operations 
of the market, is the fuller development of the 
idea of supply. The supply of a commodity is 
not as a rule in the hands of a single dealer and 
it is not definitely fixed in amount. For the 
moment the supply of any given commodity 
may be fixed by physical causes. The abun- 
dance or the meagreness of a harvest, the success 
or failure of a fishing expedition, the possession 
or the lack of suitable capital, or other causes, 
may determine the amount of the commodity to 
be offered for sale. But looking over a longer 
period, it will be recognized that these agencies 
can be controlled in large part, and at any rate 
energies can be diverted from one channel to 



VALUE 173 

another in such way as to increase to almost 
any extent desired the supply of any single 
commodity. Whether this will be done depends 
upon whether there is a sufficient motive, — 
the probability of a sufficient reward. The 
amount of the reward depends upon the final 
utility of the commodity in question to con- 
sumers. If there are many persons for whom 
it has a steady, high final utility, the supply will 
be governed by this fact. 

Here, then, we reach the fundamental cause of 
value, and the ultimate fact of which the science 
of economics need take account, — the clue 
which may unravel the bewildering maze of 
economic society. The making of goods, the 
efficiency of production, the direction which 
industry takes, the comparative efficiency of 
different economic societies, the interchange of 
products, markets, commerce, credit, value, the 
rewards to producers determined by the relative 
values of different products, — all these impor- 
tant phenomena fall into orderly relation if we 
start with the final utility of goods ^ to con- 

1 Not their market value. This is determined by two ele- 
ments, final utility and supply. 



1/4 ECONOMICS 

siimers. It is true that changes are continual^ 
taking place in the final utilities of commodities, 
and it is important that we should understand 
their cause and method of variation. But it 
is even more important that we should fully 
appreciate their pivotal character and far-reach- 
ing consequences. 

Changes in the final utility of a commodity 
to individuals do not affect the supply until 
they become so permanent and extensive as to 
influence the makers of goods, as distinct from 
those who have stocks on hand in the markets. 
But speaking only of such extensive changes, 
and regarding the power of society as fixed, we 
may say that final utility to a large extent deter- 
mines the supply. If steel acquires a higher 
utility by a discovery of important new uses to 
which it can be put, productive power is turned 
in that direction and its supply is increased. A 
multitude of economic relations are modified by 
the change. Credit, fixed capital, circulating 
capital, the market for steel, the market for 
commodities of which steel is a component 
element, the market for commodities desired 
by the producers of steel, and countless other 



VALUE 175 

phenomena, undergo more or less modifica- 
tion — all these influences originating in the 
change in the final utilities of the commodities 
affected. 

Market value is ascertained, not by observing 
the descending scale of estimates made by all 
possible communities, but by measuring, along 
this scale, the quantity which producers finally 
decide to place upon the market. Wherever 
that quantity reaches, there on the scale is the 
precise final utility which determines market 
value. If the wants of men remain unchanged 
in character and intensity, the market value is 
fixed by a simple calculation of the supply. If 
wants change, a temporary but sometimes seri- 
ous misadjustment may arise between the sup- 
ply and the anticipated rewards to producers. 
It may be found that a largely increased supply 
is met by a large reduction in the number of 
persons for whom the commodity possesses any 
high degree of final utility. The value, unless 
the stock is of such a nature that it can be with- 
held from the market indefinitely, may sink so 
low that it does not cover the costs of produc- 
tion. On the other hand, a shrewd producer 



176 ECONOMICS 

may bring a large stock at the precise time 
when final utility is rapidly rising, or he may 
induce the rise by his own skilful advertising, 
leading people to attach an altogether new im- 
portance to the want which the article is de- 
signed to satisfy. Notwithstanding his utmost 
efforts in production, he may not be able to sat- 
isfy even all of the consumers whose estimate 
of the article is sufficiently high to reward his 
efforts. If the article is one protected by patent 
or copyright, or some natural monopoly, the 
final utility may long remain near the initial 
utility, bringing great rewards to producers, and 
leaving very little margin between utilities and 
values. 

The market value of any commodity, then, is 
determined by its final utility to the last con- 
sumer, whose cooperation is necessary to ex- 
haust the supply ; or, to be more accurate, since 
this last consumer, like any of the earlier ones, 
may demand more than one increment of the 
commodity, and so count in connection with 
more than a single unit of consumption, it is 
determined by the final utility of the last por- 
tion placed upon the market. If there are any 



VALUE 177 

reservations in the minds of sellers as to the 
point below which they are unwilling to allow 
the value to fall, then to that extent their own 
estimate must be included in precisely the same 
way as that of other buyers. If all of the sup- 
ply is not taken by persons to whom it has a 
higher final utility, it is the final utility to its 
owner that determines the value of what remains. 



CHAPTER X 

THE DISTRIBUTION OF PRODUCTS 

The chapters immediately preceding have 
dealt with the abstract laws of consumption, 
prosperity, and value. It is now time to return 
to the more concrete facts of industrial society, 
in order to trace the operation of economic 
forces in the actual exchange of goods from 
hand to hand. 

Nature deals very unequally with the regions 
of the earth in the distribution of the various 
sources of wealth. If man in each region were 
dependent entirely upon the goods that he finds, 
he would be fed and clothed and sheltered in 
curious fashions. As we have seen, man makes 
goods as well as finds them. At first thought 
it might seem that this power of making goods 
would of itself rectify the inequalities of nature 
in the disposition of her free goods, since man 
would be able to make on any given spot the 
things of which nature has been niggardly in 
178 



THE DISTRIBUTION OF PRODUCTS 1 79 

her supply. If, however, we recall clearly what 
is meant by the making of goods, it will be seen 
that so far from rectifying in this manner the 
inequalities of nature, "man's industry tends 
rather to increase them. Industry is dependent 
upon nature for its materials. The making of 
goods is only the increasing of the number of 
goods and the increasing of the regularity of 
their supply. If we bring in no other consider- 
ations, what we must say of man's activity in 
the making of goods is that it produces more 
fruit where nature produces some fruit, that it 
turns to account the flesh of animals where ani- 
mals are to be found, that it unearths minerals 
from the natural mineral deposits, that it in- 
creases by cultivation the crops of grain which 
are found growing wild. Evidently all this only 
emphasizes, and does not correct, the irregulari- 
ties in the natural distribution of minerals, 
grain, fruit, and animal products. 

Surrounded by superfluous quantities of the 
goods which exist spontaneously, or are easily 
made, the inhabitants of each region are de- 
prived of the means of gratifying their most 
rudimentary wants in other directions. Hunters 



l8o ECONOMICS 

in cold regions slay the wild animals of their 
chase for a small quantity of food, and throw- 
aside their skins, being already well supplied 
with skins, and the greater part of its flesh ; but 
they suffer severely, it may be, for lack of salt, 
for iron, and other commodities which their 
environment does not provide. African savages 
may remain in the most abject poverty notwith- 
standing the ease with which they might supply 
themselves with precious ivory. A profusion of 
tropical fruits does not bring any great amount 
of real wealth to the indolent natives of equa- 
torial regions. Nor even if their indolence gave 
way to the most enterprising and vigorous indus- 
try, in the gathering and preservation of those 
fruits and other products which nature gives 
them, would that industry be of any avail to 
raise their standard of civilization, or to insure 
them a comfortably independent and normal 
existence. Midas, starving in the midst of his 
gold, is not poorer than any community which 
is dependent for its goods, and for the materials 
of its industry, upon the resources of its own 
local environment. 

This is not yet the whole truth. Industry 



THE DISTRIBUTION OF PRODUCTS l8l 

not only does not of itself correct the inequali- 
ties of nature, but it gives rise to others which 
in turn are quite as much in need of correction. 
The industrial characteristics of man show di- 
versities almost as great as those of the physical 
world. These diversities are often parallel with 
the diversities in natural products and make the 
differences in the industrial product more strik- 
ing than they would be if men of the same type 
were to be found everywhere. It may be that 
the differences in men are due to the same 
underlying causes as the differences in natural 
products. However this may be, both sets of 
differences exist, and they may at times partly 
counteract each other, while at other times their 
effort is cumulative. If Japanese turn their 
attention to the occupations which they find 
agreeable and natural, they will make goods of 
a different sort from those that would be most 
easily produced by Russians or French, and this 
would be so, even if exactly the same natural 
materials were within reach of all nations. The 
industrial characteristics of the negro are still 
observable in this country, as are also those of 
the Chinese, the Italians, the Germans, and the 



1 82 ECONOMICS 

Irish. If any one of these nations were put in 
easy contact with every variety of natural prod- 
uct upon the globe, and given free opportunity 
to gather materials of every sort, it would still 
fail to make certain kinds of goods that would 
be first produced by some one of the others. 
Of the commodities which the first nation would 
include in its total production there would be 
many of inferior quality, as compared with simi- 
lar products of the other countries. The general 
tendency of these differences in the industrial 
qualities of different communities is to increase 
the number of superfluous, and hence relatively 
worthless commodities, and to diminish the 
number of many others that might be provided 
from the materials at hand if there were the 
requisite ability to utilize them. 

There is still a third principle operating in 
the same direction with the two that have been 
mentioned, viz., the division of trades, or, as it 
is frequently but less accurately called, the 
division of labor. In the development of in- 
dustry it is found advantageous for the mem- 
bers of each community to separate themselves 
into distinct trades or occupations. The chief 



THE DISTRIBUTION OF PRODUCTS 1 83 

economy resulting from this arrangement is 
that it permits each producer to devote himself 
to the particular tasks for which he is best 
fitted by disposition and training. Not that 
this result is by any means always secured, but 
division of labor tends to secure it. There are 
certain occupations which demand great physi- 
cal endurance. Under free competition those 
who have the necessary endurance will naturally 
succeed best in those industries, and will gradu- 
ally drive out others who are not so well fitted. 
Other occupations require manual dexterity, and 
the law of evolution will gradually eliminate all 
who do not have the capacity for acquiring the 
necessary degree. There are still other occupa- 
tions in which lightness and delicacy of touch 
are the chief requisites. Generally it is a pecul- 
iar combination of qualities rather than the 
predominance of any one that is demanded, and 
mental qualities are even more decisive in most 
instances than physical qualities. By calling 
to higher occupations those who have superior 
or happily blended qualities, the division of 
labor permits much good work to be done by 
persons less liberally endowed with physical 



1 84 ECONOMICS 

Strength or mental capacity, but still able to 
compete for certain kinds of work. 

Besides apportioning producers in this man- 
ner to different tasks in accordance with their 
natural capacity, the division of labor is of 
advantage in that it permits a great develop- 
ment of specialized skill. Constant repetition 
of the same processes will produce a high 
degree of efficiency, even where efficiency is 
at first very moderate. Precision and speed 
can be gained by the average worker only by 
confining the attention to comparatively few 
operations. Practice is necessary for perfect 
work in the best of workers, and it secures 
from the great body of workers, if not perfec- 
tion, at least a very efficient total production of 
goods. 

But again it will be noticed that if the com- 
munity is self-contained, depending for its in- 
dustry, thus organized upon the principle of the 
division of labor, upon the materials which its 
members can extract from the particular portion 
of the earth's crust with which they are in 
contact, the evils flowing from the unequal 
distribution of natural products and the unequal 



THE DISTRIBUTION OF PRODUCTS 1 85 

physical and mental equipment of men are not 
remedied by such a division of labor. The 
hunters, after a division of labor, may prepare 
the skins of wild animals with less difficulty 
and in larger quantities, but the relative quanti- 
ties of the goods which they had in abundance 
have been increased by every extension of the 
principle of division of labor, and similar results 
follow its adoption in communities of other 
varieties. 

We have assumed thus far in the present 
chapter that the smallest industrial unit is 
the local community — large enough to permit 
within itself a certain degree of division of 
labor, and to secure some degree of control over 
the forces of nature ; that this community, 
owing allegiance to the patriarch or oldest 
member, and consisting only of his descendants 
and those who have been adopted from other 
families by marriage, has somewhat clearly 
marked characteristics, showing a preference for 
certain products and certain kinds of activity. 
Such a community will be able to provide for its 
absolute necessities, and it will usually possess an 
abundance of some one or more kinds of wealth. 



1 86 ECONOMICS 

If these particular commodities, which are ob- 
tained from the environment at little cost, are 
not produced in great profusion, it is only 
because their marginal utility more quickly 
falls to the level of the marginal utility of other 
commodities which, although with greater dif- 
ficulty, they still think it worth their while to 
produce. 

In such a community, as in every other, there 
would be a desire to equalize the final incre- 
ments of consumption. Labor cannot be spent 
exclusively upon the goods which are produced 
most easily, since, if the community has ad- 
vanced far enough to have any diversity of 
wants, it must spend its energies chiefly upon 
increasing the supply of the products which, in 
their environment, are scarce. In any division 
of labor which takes place, disproportionate 
attention must be given to the least remunera- 
tive tasks. Their own industrial qualities may 
or may not mitigate the difficulties imposed by 
their lot, but at best they derive no advantage 
from the lavish gifts of nature, which are offset 
by such rigorous conditions in the production 
of other and no less necessary goods. 



THE DISTRIBUTION OF PRODUCTS 1 8/ 

It would require very limited intelligence in- 
deed to discover that it would be of advantage 
for two such local communities to come into 
contact with each other, in order that they 
might exchange products. The enormous gain 
from such contact would not be so obvious to 
the communities on their first contact, as it is 
to us, for the reason that each community hav- 
ing extended its production in all the directions 
for which it has discovered any wants, is not 
ordinarily conscious of superfluity in any prod- 
ucts. If, at the moment of contact, both have 
by some accident accumulated more than their 
normal portion of the products which are easily 
obtained, or if each is suffering from the lack of 
a commodity with which the other is supplied, 
or if, again, either makes clear to the other that 
it is in the possession of commodities of some 
sort which are unknown to the other and have 
the power of adding a new enjoyment, then 
some kind of commerce in the superfluous or 
the new commodity is likely to begin. 

It will naturally begin with barter, i.e., with 
the direct exchange of one commodity for an- 
other, each community parting with the com- 



1 88 ECONOMICS 

modity which it can secure upon the easiest 
terms, for any which is either entirely beyond 
its reach, or is obtainable from its own environ- 
ment only with difficulty. When such ex- 
changes have once begun, they tend to increase 
with ever accelerating velocity. The super- 
fluity, which comes once as the unforeseen gift 
of Providence, will be secured in the future by 
conscious effort. The equalizing of the incre- 
ments of consumption will henceforth be se- 
cured, not by apportioning effort directly in 
accordance with marginal utility, but by ex- 
changing for other commodities that com- 
modity whose utility is brought below the 
margin of consumption by its abundance. This 
readjustment, by increasing the total number 
of goods consumed, may raise the margin of 
consumption, thus giving a higher utility to the 
last increment of each good consumed. 

We are thus brought again to one of the 
most important questions in economics, the one 
perhaps about which there has been more dis- 
cussion than about any other, but to which we 
have already given the answer in the preceding 
chapter. Upon what terms are the communi- 



THE DISTRIBUTION OF PRODUCTS 1 89 

ties to exchange their products ? Each has 
commodities with which it is willing to part. 
Each has learned to desire commodities which 
the other is disposed to give in exchange. 
How shall they agree upon the terms of ex- 
change } This is the question of value, and the 
answer is the same whether, the exchange is 
between individuals or between nations. Each 
community values its goods in accordance with 
their marginal utihty ; but all communities ex- 
cept that which obtains the least marginal util- 
ity will receive in the intercommunal exchange 
more than its own marginal utility, for it is the 
marginal pair whose estimates are decisive in 
determining the actual rate of exchange. If 
there are but two parties to a given exchange, 
the rate is determined by the amount that each 
must give up in order to equalize the marginal 
increments of its own consumption. When 
either of the two communities finds that the 
marginal utility of the commodity which it is 
receiving no longer exceeds that which it gives 
in exchange, the barter will cease, even though 
the other is willing that it should continue. An 
error of judgment on either side may force the 



1 90 ECONOMICS 

continuance of an unfavorable exchange, but 
even with primitive races such errors would be 
less common than might at first be supposed. 
It is not impossible even for a savage to tell 
whether a week's labor will be more remunera- 
tive, if spent in securing more of the commodity 
than others produce, than if spent in the sort of 
activity of which he secures the benefit directly. 
It is obvious that barter, or direct exchange 
of the kind that has been described, has defi- 
nite and quickly reached limitations whether 
between communities, or, in a society of a dif- 
ferent kind, between individuals. Historically, 
commerce is a growth, and whenever they have 
been reached, limitations have been removed in 
various ways ; but it will aid in appreciating the 
necessity of various features of our present 
complicated commercial organization if we try 
to picture the difficulties involved, in making 
the exchanges with which we are familiar, by a 
system of barter. Those who have surplus 
commodities of any particular sort will not 
readily fall in with others who desire them, and 
who, at the same time, possess other commodi- 
ties that are acceptable in exchange. The im- 



THE DISTRIBUTION OF PRODUCTS 19I 

probability of this double coincidence is so 
great that it would at once cut off nine-tenths 
of our present exchanges, leaving only the rude 
trading of regular farmers or hunters. 

A second difficulty would be found in the 
fact that the commodities to be exchanged 
would not have units of equal value. An 
ivory tusk, a bundle of skins, a horse and 
saddle, may each have a pretty clearly defined 
value, i.e., a clearly defined importance in the 
general aggregate of commodities which make 
up the total consumption of an individual, 
while there is still difficulty in making advan- 
tageous exchanges, because there is no con- 
venient way of expressing that value in a 
unit recognized in all the communities that 
have commercial relations. 

Practically neither of these obstacles would 
long stand in the way of commercial progress. 
A unit of value is in use almost as soon as 
there is any consciousness of the phenom- 
enon of value. Whatever commodity in any 
community is especially esteemed because of 
its importance in their daily life, or because 
of some particularly attractive qualities, be- 



192 ECONOMICS 

comes the standard of value ; and the value 
of all other commodities is intuitively ex- 
pressed in terms of that standard. Cattle 
and sheep, tobacco, wampum, iron, copper 
and silver, and many other commodities, have 
served this purpose. Instinct and reason 
have united to dictate, at each period, and 
for each people, the commodity which was 
best suited to serve as a standard of value, 
and the rule is that it is one whose margi- 
nal utility rises or falls with that of the bulk 
of commodities in use, whose marginal utility 
is therefore a fairly accurate expression of 
the margin of consumption of the people who 
use it. If two communities with different 
standards come into contact, there may be 
some friction in adjusting exchanges at first, 
but if permanent relations are established, 
the better of the two standards will gradually 
displace the other, and will become the ordi- 
nary standard of both communities. 

When a standard of value has thus been 
established, the necessity of double coinci- 
dence in barter is also obviated. He who 
desires any particular commodity can* always 



THE DISTRIBUTION OF PRODUCTS 1 93 

obtain it, if he is able to offer the requisite 
number of units of the commodity which is 
accepted as the standard. In disposing of 
his own surplus goods he has therefore to 
look, not for persons who have the com- 
modity that he desires, but only for some 
person who is supplied with the standard 
commodity. This will be an easy task, since 
every one who expects to purchase his goods 
will have supplied himself with the commodity 
which he knows will be acceptable in exchange. 
Awkward as it may be to carry around quan- 
tities of tea, strings of wampum, or bottles 
of olive-oil, or to drive a herd of oxen to the 
market-place as a condition of making pur- 
chases, it would be more economical for the 
producer, than for him to spend still more 
time in finding a purchaser who happens to 
be supplied with the goods that he wants. 

This cumbrous method of making exchanges, 
though a great improvement over direct bar- 
ter, is readily simplified by the next step in 
advance. If three persons have obtained an 
ox in exchange for some commodity that they 
have produced in common, and they wish to 



194 ECONOMICS 

divide, each taking his own share, it will evi- 
dently be necessary to slay the ox, and divide 
the carcass, — a process which may involve 
loss of value. If a person has two exchanges 
of equal amount to make in a distant village, 
one a purchase and the other a sale, it will 
evidently be an annoying and needless task 
for him to take the tobacco, or tea, or oxen, 
to the village and back again. Both of these 
wasteful processes, and many others besides, 
may be avoided if, when exchanges are made, 
a representative of the value standard can 
be passed from hand to hand, instead of the 
actual commodity which constitutes the stand- 
ard. This sensible arrangement is very soon 
discovered and utilized. When we read that 
tobacco served the early Virginians as a me- 
dium of exchange, we must not suppose that 
so many pounds of tobacco were actually 
delivered in bulk in every purchase. The 
tobacco which was thus used was ordinarily 
safely stored in a warehouse, and the owner- 
ship of it only was transferred when an ex- 
change was made, the owner of the tobacco 
giving a written order or certificate to the 



THE DISTRIBUTION OF PRODUCTS 1 95 

owner of the commodity which is given over 
in exchange for it. 

The name given to any commodity which 
thus serves a community as its standard of 
value is money. If the commodity happens 
to be suitable for general circulation, it passes 
from one person to another with every ex- 
change of goods. If not, or if it is desired 
to economize the standard commodity, its 
representative is thus used. This representa- 
tive may have a value because of its own 
utility, or its value may lie only in its repre- 
sentative capacity. Gold when first introduced 
may not have been money, but the representa- 
tive of money. It is asserted that the first 
coins were in the form of animals, indicating 
that they were substitutes for cattle. 

The gradual increase in the use of money, 
and the substitution of superior for inferior 
kinds of money, are prominent features of 
the early stages of the growth of commerce. 
But we must guard against the danger of 
exaggerating their importance. Money is in- 
dispensable as an agency of commerce, but 
it is an agency which men hit upon naturally, 



196 ECONOMICS 

and which acts all but automatically when it 
has once been introduced. The causes of 
commerce lies in the differences in the natural 
conditions of the various regions, giving rise 
to a diversity of natural products ; in the 
differences among various races and commu- 
nities, giving rise to a diversity of industries ; 
and in the division of labor, giving rise to a 
further diversity of industrial products. The 
interchange of commodities permits producers 
to reap the benefit of their natural and indus- 
trial advantages, and to obviate the necessity 
of resorting, in any particular region, to those 
features of the environment that yield but 
scanty return to labor. 

Commodities within each community are 
valued in accordance with their marginal util- 
ity, the production of each ceasing as soon as 
its utility has fallen to that of the other com- 
modities entering into the consumption. But 
the production of any such commodity may be 
extended indefinitely if, instead of being wholly 
dependent for its value upon its actual con- 
sumption within the community, it may be 
exchanged for new goods whose utility is 



THE DISTRIBUTION OF PRODUCTS 1 97 

above the margin of consumption. If there 
are many such goods obtainable, and their 
initial utility is great, it may even become 
practicable to give up the consumption of the 
last portions of many goods which had been 
consumed, and, at least temporarily, to raise 
the margin of consumption to a higher level. 
Labor would be expended in the production 
of fewer commodities ; but a larger number 
would be consumed and the marginal utility 
of each would be higher. Every article con- 
sumed, including those of which the surplus 
is exchanged, would thus have a higher sub- 
jective value than before commerce began. 

In order that commerce may be carried on 
at all advantageously, there must be a con- 
siderable degree of mutual confidence be- 
tween traders. Goods cannot be brought to a 
market to be exposed for sale unless there is 
a somewhat stable social condition. Tribes 
that are at war, or are in constant fear of 
treachery, cannot conveniently exchange their 
products, and the gradual development of com- 
merce is closely connected with the develop- 
ment of credit. A low degree of credit is 



198 ECONOMICS 

presupposed in barter, more is needed in a 
system of representative money, and its com- 
plete supremacy is required when commerce 
has extended to distant lands, and goods are 
sent great distances without the personal escort 
of their owners. 

The introduction of improved methods of 
transportation is one of the most powerful 
agencies in the development of commerce in 
its modern form. Goods cannot be exchanged 
on any large scale while they must be carried 
by human beings, or by beasts of burden, for 
the reason that their value does not justify the 
expense. Water transportation is cheaper, and 
accordingly the first commerce of any magni- 
tude is between the different ports of inland 
seas, where the dangers of navigation are com- 
paratively slight, and its economy sufficient to 
permit exchanges. Canals bring the benefits 
of water transportation to interior regions, and 
a combination of water route with a short land 
route over which goods are carried in caravans, 
finally unites places that are remote in distance. 
But until very recent times the contact was 
only occasional, and had but little effect upon 



THE DISTRIBUTION OF PRODUCTS 1 99 

the general welfare of the inhabitants of the 
regions thus brought into relation. In Europe, 
throughout the Middle Ages, exchanges were 
ordinarily confined to the different trades, or 
guilds, of a single locality. The new demand 
for foreign luxuries is the most marked charac- 
teristic of the revolution of industry and com- 
merce at the beginning of the sixteenth 
century. 

Throughout the next three hundred years 
commerce steadily advanced in importance as a 
feature of the economic life of Europe and 
America, and within the present century it has 
become far more important than ever before. 
The application of steam to ocean and river nav- 
igation and to the steam railway have worked 
a commercial revolution in the second half of 
the century. At the beginning of the century, 
the growth of the factory system, with its con- 
sequent extension of the principle of division 
of labor, had accomplished what is known as the 
industrial revolution ; but it had also its effect 
upon the development of commerce. It in- 
creased the number of the cheaply manufactured 
goods, which, if we consider only the needs of 



200 ECONOMICS 

the communities that make them, are superflu- 
ous and of little utility, but which, in a country 
with extensive commercial relations, are really 
or partly finished commodities, since they are 
made not for themselves, but for the sake of the 
goods which they will bring in exchange. 

The later revolution exhibits the development 
of a network of railways and steamship lines 
binding together all parts of the world, bringing 
Europe and America within a week of each 
other, and making it possible for each city to 
obtain from a distance, not merely spices and 
such few other goods as have great value com- 
pressed into a small bulk, but even its food 
supplies, the materials used in the erection of 
its houses, and the materials from which it 
manufactures its clothes. The extent of the 
revolution effected by the new methods of 
transportation is illustrated by the fact that a 
bushel of wheat may be shipped from Minne- 
apolis to London, only a very small part of its 
value being used up in the expense of trans- 
portation, but that wheat cannot be hauled to 
Minneapolis by wagon from a village twenty 
miles distant because of the expense. 



THE DISTRIBUTION OF PRODUCTS 201 

There is one very important feature of the 
organization of commerce of which we have 
not yet given an account, although in order 
of development it belongs earlier than the more 
striking features of the improvement in trans- 
portation facilities. Reference has been made 
to the possible difficulty of the early producer 
in finding purchasers for his product, who are 
supplied with the commodities that he desires. 
This difficulty is met by the use of some one 
commodity which all agree to accept as a me- 
dium of exchange. With this difficulty out of 
the way, the producer may next encounter one 
which is more fundamental. He may not suc- 
ceed in finding a purchaser at all. And yet 
purchasers may be quite as anxious to find the 
supply, as the producer is that they should. 
Coincidence of buyers and sellers is not so 
difficult as the double coincidence requisite in 
barter, but it may still be so difficult that a 
disproportionate amount of time is necessarily 
spent in marketing products. 

A device intended to remedy this is the set- 
ting apart of a specified building, or open square, 
in each village, to which, upon specified days. 



202 ECONOMICS 

all producers who have anything to sell shall 
bring their wares. In acordance with the par- 
ticular kind of exchanges which it is expected 
will take place in it, each stall or portion of the 
market-place is called a vegetable market, a fish 
market, etc., as the case may be. 

The market brings together in a convenient 
manner the persons of a single locality who 
have products to sell. Annual markets, or fairs, 
serve the same purpose for larger areas. Many 
of these fairs were once of national importance 
and lasted for a month or more, though the usual 
period was from one to two weeks. Such a fair 
still survives in the '' Messe " at Leipzig, Ger- 
many, and a much more extensive one in Russia, 
at Nijni-Novgorod. Within the six weeks dur- 
ing which this great fair is held it is said that it 
is frequented by 300,000 persons, and that 
goods are exchanged to the value of nearly 
^40,000,000.^ 

This plan of markets and fairs has many 
advantages. Otherwise it would not have re- 
mained, as it has in many countries for centu- 
ries, the ordinary method of making the great 

1 Gibbons, TAe History of Com?Jierce in Europe, p. 8i. 



THE DISTRIBUTION OF PRODUCTS 203 

majority of the most common exchanges. The 
grouping of these exchanges at a particular place, 
and on particular days, forms a favorable condi- 
tion for the rise of a special class of intermediate 
traders, who perform the function of transferring 
products, without bringing the seller and pur- 
chaser into actual contact at all. A buyer who 
has either studied the desires of consumers for 
himself so that he feels warranted in accumulat- 
ing a stock, or is in relation with still other 
buyers who are in such a position, gives in ex- 
change either other goods, or, more frequently, 
money or its representative. 

In one sense this is only a further extension 
of the division of labor. The dealer performs 
a part of the process of production, if he adds 
to the utility of the product by dividing it into 
smaller portions more suitable for consumption, 
by mixing different commodities, as the druggist 
does, to make them available for consumers, by 
storing goods until consumers desire them, or 
by any other of the many methods of increasing 
the utility of products just before they pass into 
the hands of their final purchasers. But all this 
might be done and often is done by the original 



204 ECONOMICS 

producers. The trader still performs a unique 
function for society by his aid in the interchange 
of products, if he merely assumes the risks in- 
volved in accumulating a stock of goods, in con- 
fidence that there are purchasers who will be 
attracted where the stock is known to exist. 

The word '' market " has been applied in an 
earlier paragraph to the special place where 
goods of a particular kind are exposed for sale. 
Even where such markets as these exist, the 
word market is also used in a wider sense. By 
the market for fruit, using the term in this larger 
sense, is meant not merely the particular place 
where fruit is exposed for sale, but the entire 
series of sales and purchases within a given area. 
It is said that there is a good market for fruit, 
when there is a considerable supply of fruit, 
within the designated area, and a considerable 
number of persons for whom fruit has a high 
subjective value. A local market is a limited 
area within -which subjective values may be com- 
pared easily, and within which the same general 
conditions of production prevail. Wider markets 
are formed when by improved methods of trans- 
portation it is found possible to transfer goods 



THE DISTRIBUTION OF PRODUCTS 205 

from one market to another, thus checking the 
tendency toward lower values in the market 
which is well supplied, and toward higher values 
in the market in which they are scarce. The 
two local areas thus become one market when- 
ever the same conditions of value prevail in both. 
The characteristic tendency of modern com- 
merce is the breaking down of the barriers 
between different markets, and the gradual 
development of the world market for all ordi- 
nary commodities. 

To nations of the modern world with their 
intricate commercial ramifications, the opening 
or closing of a market for their surplus goods is 
an event of vital significance. An abundance of 
particular natural products will not insure that ' 
markets for them will be won or held, unless 
there is also an enlightened commercial policy, 
and the commercial policy of a nation is closely 
connected with its general industrial policy. 
The manufacture of goods becomes an aid to 
commerce when it is specifically directed toward 
the markets of the world rather than toward 
those of the immediate locality. Many nations, 
both in the ancient and the modern world, have 



206 ECONOMICS 

occupied themselves chiefly in the making of 
goods which are intended for foreign markets. 
In some cases the materials from which they 
are made have first been brought from other 
countries, perhaps from the very countries to 
which the finished products are returned. The 
Phoenicians, many centuries before the Christian 
Era, were especially skilful in the preparation of 
purple and scarlet dyed fabrics, and it was their 
custom to import the new materials for these 
goods, and then to reexport them in their manu- 
factured forms. They sent out also carpets, 
works in gold, silver, ivory, amber, and glass, in 
return for which they obtained wool, hides, 
metals, and food-stuffs.^ The English, at the 
present day, import raw cotton, manufacture it 
into cloth, and return it to the very regions in 
which the cotton is grown, — obtaining in return 
for the added value, cereals, tobacco, sugar, addi- 
tional raw materials for further manufacture, and 
such other products as they may desire. 

The possibility of exchanges of this kind 
arises, either from the superior industrial skill 
and commercial enterprise of the nation which 
1 Gibbons, p. 8. 



THE DISTRIBUTION OF PRODUCTS 20/ 

thus shows itself to be independent of her local 
environment, or from the fact that the peoples 
with whom she trades find a more profitable 
employment for their energies in the production 
of raw materials, and the manufacture of special 
classes of goods for which there are peculiarly 
favorable conditions. In the early stages of 
the industrial and commercial development, a 
country will be likely to find that it is more 
economical to rely in part upon exchanges of 
this kind, permitting other and more advanced 
nations to utilize their acquired skill and machin- 
ery in manufacturing its finer products. But 
experience has shown that is wise for a nation 
to develop as rapidly as possible its own latent 
powers, to learn the processes of manufacture 
in use elsewhere, and to invent methods of util- 
izing directly the materials furnished by their 
environment. Schools of technology, experi- 
mental stations, and commercial high schools, 
are a legitimate part of the educational policy of 
a people that desires to put itself in a favorable 
commercial position. The object aimed at is 
not a sundering of commercial relations with 
other nations, but rather the strengthening of 



208 ECONOMICS 

those relations, by offering in the markets of the 
world more and more valuable products. The 
method will be not so much the duplicating of 
the best products of the industry of other 
nations, as the systematic study of the wants 
of all consumers, including ourselves, recogniz- 
ing that there are wants not adequately sup- 
plied, or capable of indefinite expansion if the 
appropriate commodities can be supplied. 

This suggests wherein lies the real benefit of 
commerce to a nation, as made up of importers 
and consumers. The standard of living includes 
all those commodities that have a marginal util- 
ity above the margin of consumption, and that 
are so intimately interrelated that the absence 
of any one would induce consumers to modify 
their consumption, or to increase their industry 
sufficiently to restore it. Commerce, by making 
it possible to secure new commodities on more 
favorable terms than is permitted by the local 
environment alone, adds to the consumption a 
greater or less quantity of each of the new com- 
modities, in accordance with their marginal util- 
ity. The effect is immediately noticeable in 
the improvement of the standard of living, not 



THE DISTRIBUTION OF PRODUCTS 209 

only increasing the number of commodities that 
it includes, but, what is more important, render- 
ing it more stable, and lessening the probability 
that serious deduction will be permitted, so long 
as greater economy in use, or greater energy in 
production, can prevent it. 

The introduction of quick transportation has 
brought immense quantities of fruit into the 
markets of every city and village. The use of 
beet-root for the manufacture of sugar has 
added a staple product to the world markets. 
Changes in the methods of working up iron ore 
into iron and steel have practically given a new 
material for the construction of buildings, and 
for a thousand other uses. The building of rail- 
ways, the improvements in ocean steamships, 
and the introduction of agricultural machinery 
have brought about a fall in the prices of agri- 
cultural products so great as to amount to a 
revolution ; and the development of the packing- 
house industry, supplemented by the rise of the- 
frozen-meat trade, has caused a corresponding 
dechne in the price of meat. These are only 
typical of the far-reaching changes of the past 
two decades. What is their significance in the 



210 ECONOMICS 

general interchange of products among the in- 
habitants of the earth ? That they will be 
followed by radical changes in the standard of 
living in many countries, is certain. We may 
expect that the urgent necessity of finding new 
and enlarged markets will stimulate commerce 
with the more backward races, and that cheap- 
ened products for our own population will mod- 
ify our industrial and social life. The changes 
going on in our midst in the grouping of popu- 
lation, in the development of new and more 
complex desires, in the increase of leisure by 
the shortening of the hours of labor, in the en- 
largement of individual capacity by better train- 
ing of muscle and mind, are dependent upon an 
effective distribution of the products of an effec- 
tive industry. 



• CHAPTER XI 

MONEY 

The evolution of industry begins within 
the family community. Since the family pro- 
vides for all its own necessities, what we 
know as exchanges do not take place. Family 
discipline compels each member to make his 
due contribution to the general stock, and the 
goods are distributed as the needs of the 
several members require. Marginal utility 
shows itself, not as value, but as the regu- 
lator of the amount of energy to be expended 
in each of the possible directions. The second 
stage in the evolution of industry is reached 
when each family exchanges with others in 
direct barter. Value now appears occasion- 
ally as power in exchange. An increase in 
the number of exchanges finally gives rise to 
the market, and to a special class of inter- 
mediate traders. The evolution of the market 
creates a demand for a standard of value. 



212 ECONOMICS 

Money is put to many other uses, but there 
is none except its service as a standard of 
value that is inseparable from the idea of 
money and that could not be filled by some- 
thing else than money. 

It would seem that the only real requisite 
characteristics of money are permanence of 
qualities and universality of demand, within 
the area of the given market. Both of these 
characteristics are relative, and it is meant 
only that the commodity chosen must possess 
them in higher degree than goods in general. 
If the widening of the market discovers some 
other commodity more generally desired, or 
of more permanent value, the latter will tend 
to displace the former as the recognized stand- 
ard of value. These two considerations are 
sufficient to rule out as money, at once, many 
of the commodities to be found in any one 
community, and to designate the one or two 
that are suitable. In a region well supplied 
with grass and peopled by herders and shep- 
herds, the idea of permanence is naturally 
associated with cattle and sheep. They are 
everywhere recognized as a source of wealth. 



MONEY 213 

Possession of a large herd gives distinction 
and credit, and hence a position of power in 
the community. A man's wealth is naturally 
measured in the number of. his cattle, and 
after a time this manner of speech becomes 
so well established that it is applied even to 
persons whose wealth really exists in other 
forms. At any given time a man is said to 
be worth so many cattle, if his wealth could be 
exchanged for that number, even though at the 
moment he does not own a single animal. 

In an agricultural colony, like those of 
Virginia and Maryland, tobacco or some other 
agricultural product is more readily associated 
with the idea of permanence and general de- 
mand, — partly, however, because there is an 
unlimited foreign demand for that product. 
If it were desired only by the inhabitants of 
the colony, the fluctuations in value, resulting 
from the difference in the crops of different 
years, would be so great as to render it unfit 
for money. Salt is a suitable commodity to 
serve as mioney among a people that do not 
have direct access to salt mines or deposits, 
or that have not learned to produce it by 



214 ECONOMICS 

evaporation of salt water ; but as soon as 
they are brought into close although irregular 
contact with a liberal supply, it loses its money 
characteristic. No commodity that is manu- 
factured especially for a particular market, and 
is not generally desired by other people with 
whom its manufacturers trade, can serve as 
money, though it may serve for purposes of 
barter with the people who have an eager 
desire for it. Opium, rum, blankets, gaudy 
clothing, firearms, and silver have frequently 
been carried to semi-barbarous peoples in ex- 
change for ivory, slaves, or other forms of 
wealth. Sometimes commercial traders have 
made three-cornered exchanges, giving up 
their own products for these that are known 
to be especially desired by the people who 
own the goods that they, the traders, desire ; 
but this is still barter, rather than sale and 
purchase. If in these cases, however, the ex- 
changes are made with a definite reference to 
some standard of value, which has the char- 
acteristics mentioned, permanence and univer- 
sal demand, then they are true sales and 
purchases, and the commodity thus used is 



MONEY 215 

true money. Iron may serve as money among 
a people that treasure every particle of it that 
can be secured, because of its scarcity and its 
great utility, but it would be extremely unfit 
in countries where its value is determined by 
continually fluctuating conditions of use and 
production. 

From very early times, in the countries 
which have engaged in commerce, the standard 
of value has usually been one or the other of 
the so-called precious metals, silver preceding 
gold, as copper or iron had probably preceded 
silver. But the use of neither silver nor gold 
has been strictly continuous as the standard of 
value in Europe from the time of their first in- 
troduction in the early days of commercial in- 
tercourse. The conditions of their production 
have varied in different epochs, and their value 
has stood in different relations to the values of 
commodities in general. It has already been 
noted that the English colonists in America 
were at first without any metal which they con- 
sidered suitable for a standard of value. During 
the Middle Ages copper was extensively used. 

In various countries the exigencies of war 



2l6 ECONOMICS 

have sometimes driven the rulers to the use of 
a representative money of which the basis was 
not silver or gold, but national credit. That is 
to say, the government paid out for supplies of 
various sorts a paper currency which their 
owners accepted in exchange, in the belief that 
commodities of equal value could subsequently 
be obtained by themselves for the paper. This 
kind of representative money is based solely 
upon the confidence that the government will 
subsequently by taxation or otherwise obtain 
the commodities necessary to redeem the cur- 
rency when presented. Unfortunately this con- 
fidence has not always been justified, and in 
times of war, when the national credit is natu- 
rally low, it is usually difficult to induce the 
people to accept a purely representative money. 
While the wars of the French Revolution were 
in progress, a money was issued which was 
based, not upon national credit, but upon lands 
which had been confiscated by the government 
and which were pledged for the redemption of 
the currency. This plan was even less suc- 
cessful than the other. 

In general, we may say that the money of 



MONEY 217 

civilized races has been from the earliest dawn 
of history either silver or gold, and that the 
latter has tended to displace the former wher- 
ever there has been steady economic progress 
and industrial advance. The reason why gold 
is a better commodity than any other to serve 
as money is that it possesses in preeminent 
degree the qualities which we have indicated as 
essential. The permanence of its value, guar- 
anteed by the universality of its demand, is 
greater than that of any other commodity with 
which we are familiar. Moreover, it has cer- 
tain physical peculiarities which fit it to serve 
as an actual medium of exchange. If we were 
content to use representative money only for 
actual exchanges, these physical properties 
would have less bearing upon its use as money, 
but the custom of using the same commodity 
both as a standard of value and as a medium of 
exchange becomes established before there is 
sufficient enlightenment or public confidence to 
permit the general use of a representative cur- 
rency ; and that custom is only gradually dis- 
placed even when it does not remain in full 
force. 



2l8 ECONOMICS 

The special qualities possessed in an unusual 
degree by gold, are shared in part by precious 
stones, in part by platinum, in a still higher de- 
gree by silver, and to a limited extent by 
bronze. But no other commodity possesses 
them all in such happy combination. In the 
first place, gold is easily recognized by tests 
which the ordinary man may apply. From 
whatever mines it may come its quality is uni- 
form. In the melting-pot the gold of Australia 
and of California, and the gold mined by the 
Romans in the time of Caesar, are found to 
have identical qualities and to be indistinguish- 
able from each other, but easily distinguishable 
from all other metals. Gold then is everywhere 
the same commodity, and it is everywhere ea- 
sily identified. Secondly, gold possesses great 
value in comparatively small bulk. It is pos- 
sible to carry an amount which represents a 
great quantity of ordinary commodities, or as 
small a fraction of that amount as may be de- 
sired. It is easily divisible. It is possible to 
divide any given portion and to reunite the 
parts with a minimum of waste. This high 
value in proportion to bulk, coupled with easy 



MONEY 219 

divisibility, renders gold more useful as a me- 
dium than either the diamond, which resembles 
it in the first particular but not in the second, 
or any of the baser metals, which have the sec- 
ond characteristic but not the first. In the 
next place, gold has extraordinary durability. 
In its pure state it is worn out by constant use, 
but when slightly hardened by the mixture of 
other metals it wears so slowly as to be nearly 
imperishable. Coins still exist which were in 
active circulation over two thousand years ago. 
Finally, gold is suited by its malleability for 
coinage, though, because of its high value, only 
for the larger units. 

When gold and silver were first used as 
money it was in the form of bars or ingots. It 
was necessary in each transaction to weigh the 
metal and to test its fineness. Later they were 
pressed into solids of regular form, each con- 
taining specified weight and of specified quality. 
It was now possible to tell the value of a given 
quantity by merely counting these bars or 
ingots ; or rather this would have been suffi- 
cient if the stamp or other indication of quality 
and weight could have been relied upon. This 



220 ECONOMICS 

was not the case so long as it was possible to 
cut or file away a part of the block without ma- 
terially changing its appearance. This tempta- 
tion was repeated with every person through 
whose hands the ingots passed, and it would 
have been strange if some dishonest persons 
had not yielded to it and regularly practised the 
debasing of the money units. 

This integrity was not insured until the sys- 
tem of coinage was discovered and perfected. 
Coins were first stamped upon one side only, 
evidently not a sufficient protection ; then upon 
both sides, still leaving the edge exposed ; 
finally, the edges were milled and surmounted 
by a rim. By these devices the monetary unit 
was fully protected. No one will mutilate a 
coin if by doing so he renders it impossible for 
him to pass it in current exchange. We have 
now become so familiar with the exact form of 
a perfect coin that we instinctively refuse to 
accept any which has been filed or drilled or 
unduly worn. 

Coinage is undertaken in each country by the 
government and is forbidden to private individ- 
uals. The reason is obvious. The entire eco- 



MONEY 221 

nomic activity of society is so far dependent upon 
the money which it uses that it is absolutely 
essential to have it reliable and uniform. The 
value stamped upon the monetary unit which 
is to serve as the standard of value should in 
all cases correspond to its real value. The 
quantity and quality of metal which it is said 
to contain should really be found in case it is 
tested. Governments have in the past taken 
advantage of the opportunity to debase the 
coinage, by putting less than the nominal 
amount of the valuable metal into the coin, but 
both national honor and the certainty of speedy 
detection would prevent resort to such means 
in these days, and the business is safer in the 
hands of the government than elsewhere. 

The decimal system of monetary units now 
in use in all prominent civilized countries except 
England is of great commercial convenience. 
The ease with which our own monetary system 
is mastered when compared with the effort 
required to learn the tables of weights and 
measures in use, suggests the gain to commerce 
and industry of a decimal or metrical system of 
weights and measures, formed upon the same 



222 ECONOMICS 

sensible plan that has been adopted in France 
and other European countries. 

Although some one commodity, and, under 
modern conditions, practically either gold or 
silver, must be adopted as the standard of value, 
it does not follow that all the coins in current 
use must be made of that material. Money of 
account has sometimes been a quite different 
thing from any coinage in actual use, and 
oftener several of the units of the money of 
account were not represented in the coinage, 
even when they were thought of in terms of the 
same commodity. Thus in England, during the 
Norman period, the only coined money of which 
we are certain was the silver penny, while the 
pound and the shilling were used as money of 
account.^ Foreign gold coins were in circula- 
tion at the same period. At the present time 
gold is the standard of value in this country, 
and gold coins form a part of our circulation, 
but coins are also made of silver, nickel, and 
bronze. Wherein do these coins differ from 
the gold coins and their paper representatives ? 
There would be no essential difference if the 

1 Gibbons, p. lOO. 



MONEY 223 

value of the metal in the different coins were in 
exact correspondence. In fact, however, ten 
silver dollars, twenty half dollars, forty quar- 
ters, two hundred five-cent pieces, and one 
thousand one-cent pieces, though they exchange 
readily for fifty gold dollars, would not be worth 
so much merely as bullion, and the gold in an 
eagle would be worth more than the metal in 
any one of the above mentioned quantities of 
money that constantly pass for ten dollars. 

This is explained by the demand for money 
in a convenient form for change. Its marginal 
utility is kept high by limiting the amount 
coined. If coinage were unlimited, it would be 
profitable to melt and coin silver bullion until 
its nominal value became equal to its bullion 
value. Since coinage is in the hands of the 
government, this can be prevented. It is desir- 
able that the government should use this power 
to give increased value to the smaller coins, — 
to the subsidiary coinage, as it is called, — only 
because there would otherwise be a constant 
danger that the subsidiary coins would by the 
fluctuations in their value come to exceed that 
of the standard coins. It would then become 



224 ECONOMICS 

profitable to melt down the silver, nickel, or 
bronze coins for their bullion, which would be 
more valuable than the coins. This is not 
illegal, as is the reverse process, and it is to pre- 
vent this that the subsidiary coinage is gener- 
ally slightly overvalued in the coinage. It is 
much easier to prevent dishonest persons from 
making coins without authority, i.e.y counter- 
feiting, than to prevent the melting down or the 
carrying out of the country of coins that had 
risen in value above that of the standard money. 
At the same time the difference between the 
value of the standard and other coins should 
not be very great. Although the government 
makes a clear profit of forty cents whenever it 
coins sixty cents' worth of nickel or silver into 
pieces which are stamped one dollar, and are 
accepted for that amount, yet this is only indi- 
rect taxation and not its best form. Under 
this method all the subsidiary coins become 
really representative money to the full extent 
of the difference between the bullion and their 
exchange value. If it is ever desired to make 
them anything else than representative money, 
it will be necessary to call them in for redemp- 



MONEY 225 

tion at the full value at which they were issued, 
thus sacrificing the advantage gained by their 
original coinage. 

This is at present the actual position of our 
own silver coinage. The government has realized 
a profit of several million dollars, but the value 
of the bullion in each silver dollar is so low that 
it can be regarded only as a representative dol- 
lar and not as real money. The only difference 
between our silver currency and any paper rep- 
resentative money that the government might 
issue is that the silver currency is made from a 
more expensive material. Its value is main- 
tained in precisely the same manner as that of 
any other representative money, viz., by the 
general confidence that the government will in- 
sure a continuance of its equivalence with real 
money. 

No commodity has been suggested that com- 
bines the essential qualities of a standard of 
value with the physical properties requisite for 
a medium of exchange in small transactions. 
It will probably remain necessary, therefore, to 
constitute the coinage as at present from metals 
of different values, in quantities corresponding 
Q 



226 ECONOMICS 

to the relative numbers of large and small ex- 
changes. To prevent the export or melting 
down of its small change, it will be necessary to 
make it to some extent representative in charac- 
ter by making it slightly more valuable as coin 
than as bullion, but any very wide discrepancy 
between the value of the standard money and 
other money in the form of coin is to be avoided, 
as rendering the currency unstable. If the sub- 
sidiary coin is issued in excess, it is liable to fall 
in value to the extent that it has been over- 
valued, thus causing wide-spread disturbance. 
In the absence of a special law requiring the 
acceptance of the less valuable money in pay- 
ment of previously incurred debts, no one will 
be found willing to accept it at its face value as 
legal tender. If there is a law requiring the 
use of the cheaper money, the values of other 
commodities will become adjusted to the lower 
standard and the better money will disappear 
from circulation. 

The enactment of a legal tender law specify- 
ing which kinds of money may be lawfully used 
in the discharge of debts introduces a new factor 
of great importance into the national monetary 



MONEY 227 

system. We have seen that it is natural for 
good money to displace that which is imperfect 
or not adapted to the present condition of com- 
merce. Whenever a commodity once used as 
money has become unfit for such use by the 
fact that changed conditions in production cause 
greater fluctuations in its value, or by any other 
cause, there is always at hand some other com- 
modity to take its place. The law of natural 
selection thus insures the use of the money best 
suited to the particular commercial and indus- 
trial conditions. 

These principles are greatly modified by the 
adoption of a ''legal tender." Let us first sup- 
pose that only one kind of money is designated 
by the law as satisfactory payment of debts, but 
that there are in circulation both new coins of 
full weight, and others that are much worn or 
otherwise reduced in value. The law does not 
discriminate, but permits any properly stamped 
coin to be used in the payment of debts. This 
evidently applies only to debts due within the 
country. For the payment of debts incurred in 
international exchanges the coins are not counted 
but weighed. In other words, the coins pass 



228 ECONOMICS 

for their bullion, not for their face value. If a 
merchant has payments to make both at home 
and abroad, he will naturally use the best coins 
for export, and the poorer ones for home pay- 
ment, because the coins exported are to be 
weighed, while those to be paid at home are 
only counted. When the conditions call for the 
export of coin, a nation will lose that part of its 
currency which is of full weight if there is any 
considerable part of it that has become light. 

The same tendency is shown on a larger scale 
if there are two kinds of money, declared by law 
to be equally legal tender for the payment of 
debts. Here there is wider room for the dis- 
crepancy in real value, since fluctuations in 
the conditions of production or in the general 
demand for either commodity will cause it to 
have a different marginal utility, and hence a 
different value from that of the other. The 
better money will then be driven out of circula- 
tion by the cheaper, since either can be used in- 
differently at home, while, in any international 
transactions, the more valuable coin will pur- 
chase more commodities and will therefore be 
preferred. The difference in value may not be- 



MONEY 229 

come apparent so long as there is no more money 
in circulation than the local conditions require. 
By limiting the total amount of the circulation, 
the baser coin may be given a higher exchange 
value than it would have as bullion, since as we 
have already seen it would act as representative 
money. The law that bad money drives out 
good money under the conditions specified, — 
an excess of currency and an established legal 
tender, — is ordinarily known as '' Gresham's 
law," from the writer who first formulated it, 
Sir Thomas Gresham, an Englishman, who lived 
in the sixteenth century. 

We have just used the expression "an excess 
of currency." It is important that we should 
understand in what sense the currency of a na- 
tion may be in excess of its needs, and how this 
condition is remedied. The money value of any 
commodity is generally spoken of as its price. 
When the price of a commodity varies we com- 
monly suppose that the value of the commodity 
has varied. This is not necessarily the case. 
Price is a ratio, and the variation may have taken 
place in its other term, viz., money. If a very 
large number of commodities have fallen or risen 



230 ECONOMICS 

in price, and this movement is not balanced by- 
opposite movements in the prices of other com- 
modities, we feel reasonably sure that it is 
money itself and not the commodities that have 
changed in value. If we could suddenly increase 
the volume of money in any isolated community, 
leaving the relations of all other commodities to 
each other unchanged, the effect would be a rise 
in the prices of all commodities to correspond 
with the increase of volume. A day's labor 
would exchange for a large sum of money, but 
the laborer would be compelled to pay propor- 
tionately higher prices for the goods which he 
purchased. 

If a community had no business relations 
with other communities, it would be a matter of 
comparative indifference whether prices were 
high or low. Their level would be determined 
exactly by the quantity of money in circulation 
at any given moment, a large quantity giving 
high prices and a small quantity correspondingly 
low prices ; or, stated inversely, high prices 
would indicate a liberal supply of money and 
low prices a smaller supply. All values except 
that of money would remain constant, while the 



MONEY 23 1 

value of money would be great where prices 
are low and less where high prices prevail. 
Neither the high nor the low level would afford 
any indication of the prosperity of the commu- 
nity, or of the total quantity of wealth in exist- 
ence. The sole difference would be that in the 
period of high prices a given quantity of money 
would exchange for a smaller quantity of any 
other commodity, and that a given quantity of 
any commodity would command a higher price, 
than in a period of low prices. In the above 
statement of the relation between prices and the 
quantity of money in circulation, we have as- 
sumed that the community is isolated, i.e., with- 
out any relations with other communities that 
would permit prices to be compared 6r money 
to be carried from one to the other. In fact, 
no community is in such a position, and the law 
of the international distribution of money acts 
through the medium of the price level of differ- 
ent countries. 

By a method which seems automatic, and 
really is so, although it is only a phase of the 
general law of the distribution of products, 
money flows from the places where it is abun- 



232 ECONOMICS 

dant to those where it is relatively scarce. 
Abundance, as we have seen, is indicated by 
the high prices of commodities, while scarcity 
reveals itself in prevailing low prices. As soon 
as the difference is sufficient to cover the cost 
of transporting goods that have been for sale 
in the region of low prices, those who have 
them for sale will naturally send them to the 
places where better prices are to be had for 
them. The region of high prices offers a better 
market for goods and it will be sure to attract 
them. But it is a poor place to buy, since the 
prevalence of high prices will prevent a pur- 
chaser from securing as much for his money 
as in the place where prices are lower. Both 
causes operate to insure a flow of money to 
the region in which it is scarce until a uni- 
formity of prices has been secured. An 
increase of money, in a community with 
commercial relations, beyond that amount 
which the law of international prices allows, 
would be a disadvantage if it did not thus 
bring its own remedy. 

In our original statement of the relation 
between prices and the quantity of money in 



MONEY 233 

circulation, we assumed further that the change 
in the volume of money was made suddenly or 
in such manner as to affect similarly at the 
same instant the prices of all commodities. It 
is evident that by any of the ordinary methods 
in which the quantity of money is increased or 
diminished the effect is not thus generally ex- 
perienced at the same moment. Some com- 
modities change in price more quickly than 
others. Some persons have fixed incomes call- 
ing for definite amounts of money each year 
or month, regardless of the purchasing power 
of the money that they receive, and there is 
friction of many kinds that prevents a uni- 
versal rise or fall of prices to correspond exactly 
with the increase or decrease of the currency. 
The result of any change in the volume of 
the currency is, therefore, to change the value 
relations of commodities, giving some, for a 
time at least, relatively lower values than 
others. Such changes have therefore mo- 
mentous social consequences. 

One additional consideration of great im- 
portance remains to be noticed. Prices do 
not result from a simple comparison of the 



234 ECONOMICS 

quantity of commodities with the quantity of 
money. Money is the standard of value and 
performs its function by acting as a medium 
of exchange. It becomes the standard in virtue 
of its constant use as such medium. It is, 
therefore, not the total stock of commodities, 
but the number of exchanges taken in con- 
nection with the value of the commodities to 
be exchanged, that constitutes the demand for 
money. By the total volume of business is 
meant the value of the commodities exchanged 
in a given time, multiplied by the number of 
exchanges that are made. If the total volume 
of business remains constant, the amount of 
money required is also constant. If the volume 
of business increases or diminishes, the volume 
of money must increase or diminish in propor- 
tion, else there will be a rise or fall in prices 
similar to that which would accompany a dimi- 
nution or increase of money with business 
stable. The law of the international distri- 
bution of money does not, therefore, insure 
to each country an unchanged quantity of 
money, but that the supply of money will 
preserve a constant relation to the amount of 



MONEY 235 

work which there is for money to do, that it 
shall bear always the same relation to the 
number of exchanges taken in connection with 
the value of the commodities exchanged. 

The shipping of money, from one country 
to another, is usually associated with the ad- 
justment of what is known as the balance of 
trade between the two countries. The bulk 
of the exchanges between any two countries 
that form parts of the modern commercial 
world, is settled, not by purchase and sale for 
money, but by the transfer of bills of exchange. 
Suppose that a merchant in Liverpool, having 
purchased a cargo of cotton from Savannah, 
knows of a wholesale dealer in his own city 
who has sold a quantity of manufactured cloth 
of equal value to an importer in New York. 
It would involve useless expense for him to 
send his money to America while at the same 
time an equal amount of money is on its way 
from America to England to pay for the goods 
purchased in New York, if some way could be 
found for the two accounts to be set off against 
each other. The New York importer can be 
directed to pay the cotton-grower in Georgia 



236 ECONOMICS 

on condition that the Liverpool dealer in cotton 
will pay the cloth-manufacturer. If the Ameri- 
can ends of both transactions are, Hke the other, 
in the same city the economy of this method of 
squaring accounts is still greater. It is prob- 
able that, in any event, there are transactions 
between Savannah and New York City that 
will obviate the necessity of sending the coin, 
and that the two accounts can be adjusted 
by a transfer of domestic bills of exchange or 
drafts. 

The same principle that we found operating 
in the market to prevent the necessity of every 
seller finding his own buyer, again comes into 
operation. Special dealers in bills of exchange 
take the risks of purchasing from exporters the 
bills which will be useful in paying for goods 
that are to be imported into the same market. 
These bills are at a premium when goods are 
coming in faster than they are exported, since 
that means that gold must be shipped to cover 
the difference. The shipping of gold is more 
expensive than the mailing of a bill of exchange, 
and a slight advance on the amount of the trans- 
action must be charged to cover this expense. 



MONEY 237 

This state of commerce in which the value of 
the imports exceeds that of the exports, so that 
money must be sent out of the country to cover 
the difference, is described as an unfavorable 
balance of trade. If the exports exceed the im- 
ports, so that foreign exchange is at a discount 
and gold is flowing into the country, the balance 
of trade is said to be favorable. These expres- 
sions are, however, misleading. Neither condi- 
tion is necessarily favorable or unfavorable to 
national welfare. If a country were in position 
to continue indefinitely paying out money for 
goods, it would be an indication that it was 
wealthy, in the possession of mines of gold, 
and that the marginal utility of the gold was 
lower than that of the goods imported. The 
exchange of her gold for other commodities 
would be a clear gain, as is the exchange of sur- 
plus wheat for any commodity that is more 
desired. 

Unless the cause be the possession of mines 
sufficiently rich to make gold one of the regular 
and profitable exports, the balance of trade can- 
not remain permanently unfavorable, for the 
reason already explained. The scarcity of money 



238 ECONOMICS 

resulting from the export of gold causes prices 
to sink to a lower level than that of other coun- 
tries. This will immediately check the importa- 
tion of goods which have been coming, and will 
induce a return of money from buyers who wish 
to take advantage of the reduction in prices. If 
the reduction has been slight, either one of the 
two forces may alone restore the equilibrium. 
The shifting of the balance of trade causes 
money to flow now here, now there, in response 
to the most delicate changes in the market. 
With ocean greyhounds to carry any amount 
of money from Europe to America, or vice 
versa, within a week's time, and with the ma- 
rine cable to communicate every fluctuation of 
the rates of exchange, the prices of commodi- 
ties tend to approach the same level through- 
out the civilized world. 



CHAPTER XII 

THE ORGANIZATION OF CREDIT 

Every economic relation between two mem- 
bers of society implies credit, or confidence that 
the service or commodity given by one to the 
other will be repaid immediately, or at some fut- 
ure time, as may be agreed. Credit has already 
been enumerated as one of the most prominent 
features of the social environment of man. It 
has been seen that barter, purchase on condition 
of deferred payment, the use of representative 
money, and the interchange of products between 
distant places, are all in different degrees de- 
pendent upon some kind and degree of credit. 
We are now to examine from a different stand- 
point the place of credit in the economic organ- 
ization of society. 

Banks exist for the special purpose of 
organizing credit in such a way as to make it 
of use in commerce and industry. The nature 
239 



240 ECONOMICS 

of credit will best be explained by a reference 
to the various steps by which the institution 
of banking has developed. In their simplest 
form banks were merely associations of mer- 
chants whose money was deposited permanently 
in a common treasury. In the earliest histori- 
cal example, the Bank of Venice, the deposit 
was the state treasury, and the money once de- 
posited was never returned. But the principle 
will be made clearer if we suppose the money 
to have been placed in a vault under the care of 
a custodian chosen for the purpose by the mem- 
bers of the banking association. Each member 
is credited with the amount of his purchase. 
Whenever he desires to make a purchase with 
any part of the money which he has deposited, 
he does not withdraw it, but simply directs that 
the ownership shall be transferred on the books 
of the bank to the person from whom he has 
made the purchase. If this second person is a 
member of the banking company, the money in 
the treasury is not disturbed, but the account of 
the one member shows a larger and of the other 
a smaller credit than before the transaction took 
place. Every transfer of goods among the mem- 



THE ORGANIZATION OF CREDIT 24 1 

bers of the association is thus represented by a 
transfer of a corresponding amount in the credit 
at the bank, which takes the place of a transfer 
of money. 

The word " credit " has here a slightly differ- 
ent meaning from that which we have assigned 
to it in preceding chapters. Heretofore we have 
used it as a synonyme for confidence or trust. 
In the present sense it indicates power over 
commodities secured in this instance by full 
payment of money in advance. It is only in 
this latter sense that we can speak of the 
organization of credit. The word would hardly 
have been used in this sense except for the 
practice of extending this power over com- 
modities on trust to persons who had not 
actually advanced payment for them. 

The bank, in the simple case described, ob- 
tains money from each of its members giving 
in return credit, or the power of drawing 
upon it for the amount of the deposit. Be- 
fore such an arrangement as this can be made 
the bank itself must have gained credit ; or, 
to put it in another way, the members of the 
proposed company must have gained sufficient 



242 ECONOMICS 

mutual confidence to justify their intrusting 
their money to the common treasury. 

The advantages of this most primitive kind 
of banking are, first, that it reduces the wear 
of coin. Money will last longer properly 
stored in a safe vault than in actual circula- 
tion. Secondly, it makes easier the adoption 
and maintenance of the best kind of money. 
If the currency consists of many kinds of 
coinage, some of full weight and others worn 
or debased, the bank will perform a useful 
service for its members by reducing the value 
of the different deposits to the common stand- 
ard, obviating the necessity for future tests 
at each exchange. This useful function was 
for a long time denied to banking institutions 
in England by the crown, which kept this 
profitable business in its own hands. Thirdly, 
if the members of the banking association 
live in different cities, considerable expense 
and difficulty in transporting coin is saved. 

From this system of banking, of which the 
advantages are confined chiefly to those who 
have entered into a special business relation, 
there naturally springs a more general use of 



THE ORGANIZATION OF CREDIT 243 

the forms of credit to which the system has 
given rise. The written orders or bills drawn 
against the bank, when duly certified, are ac- 
cepted as representative credit. They supple- 
ment the money in circulation in the manner 
described in the chapter on the distribution 
of products. Banks find that their own credit 
enables them to meet all demands upon them 
from their depositors without actually retain- 
ing in their vaults all the monies deposited. 
Such amounts as are not needed may be lent 
out at a profit. Among the most frequent 
loans in the early days of banking were those 
to the government. Sometimes the king 
would have urgent need for mone}^, for which 
taxes had been voted, but which had not yet 
been collected. Those who possessed hoards 
of money were in position to advance it on 
a pledge that it would be repaid with interest 
at a specified time. In some instances the 
original loan was never repaid, the bankers 
receiving instead an annual interest. The 
famous Bank of England was founded to re- 
lieve the necessities of the government. The 
bank consisted of subscribers who had lent 



244 ECONOMICS 

i,200,000;£ to the government on the security 
that out of the payments of tonnage ^ they 
should annually receive eight per cent, or, in 
all, I00,000;£".2 The bank thus organized was 
also to have the privilege of carrying on an 
ordinary banking business, i.e., to receive money 
on deposit and to lend it at interest. Until 
this time in England the banking business 
had been chiefly in the hands of the gold- 
smiths. It was the practice for merchants to 
keep their available funds in the chests of 
the goldsmith, drawing it out when neces- 
sary, but usually by means of orders or bills 
which were used in the payment of debts 
and which generally passed through many 
hands, just as modern bank-notes do, before 
they were presented for payment. 

Experience showed that fully one-half — or, 
in favorable circumstances, even two-thirds — 
of the funds thus collected in a large and stable 
bank might safely be used in outside loans. 
If one-third or one-half of the deposits were 

1 A tax on ships. 

2 Cunningham, Grozvth of English History and Commerce, 
n., 395- 



THE ORGANIZATION OF CREDIT 245 

kept on hand in the form of ready cash, it 
would be sufficient to meet all ordinary de- 
mands. The reason for this is that a depositor 
seldom draws on the bank immediately for the 
full amount of his deposit, and since there are 
every day new deposits there will always be 
some money not in danger of withdrawal ; 
secondly, one who receives an order for money 
will not take the trouble to present it if he can 
satisfy his own obligations, or make new pur- 
chases with the order just as well as with the 
cash that he would obtain by presenting it. 
Only careful experiment and wise judgment 
will enable the bankers to estimate correctly 
the extent to which they may rely upon these 
two facts in the management of their business. 
Depositors are easily alarmed, and if there is a 
rumor that the bank is in the least danger of 
failing to meet their demands upon it, there 
is certain to be a rush of withdrawals far in 
excess of the ordinary demand. Such emer- 
gencies severely test the ability of the bank to 
render available its outstanding loans and in- 
vestments. In times of crisis, banks have 
frequently failed, notwithstanding an abundance 



246 ECONOMICS 

of assets, merely because they are not in a form 
available for immediate use and could not be 
exchanged for ready cash except at a great 
sacrifice, if at all. 

The proper basis for representative credit is 
not therefore wealth, in general, but those 
forms of wealth that can be readily realized 
upon when the necessity arises.^ For a sound 
basis it is further essential that the available 
funds should be accurately proportioned to 
the existing stage of commercial development. 
Where people are accustomed to the banking 
system, and where banks are in the habit of 
coming together for mutual assistance in periods 
of danger and public distrust, the whole field of 
credit is vastly extended without corresponding 
increase of the reserve funds in the vaults of 
the banks. Where people are accustomed to 
barter, or to use coins in all purchase and sale, 
the field of credit is closely circumscribed. 

The most primitive and widely diffused form 
of credit, antedating the rise of banks, is that 
of book accounts. The merchant grants a 

1 There, in part, lay the difficulty with the assignats of the 
French Revolution. 



THE ORGANIZATION OF CREDIT 247 

period of time to his customer for the payment 
of' goods bought, himself receiving in turn 
similar grace from the wholesale dealer. This 
system springs from the greater convenience 
to buyers from the permission to postpone pay- 
ment for irregular purchases until a future date, 
usually fixed with some reference to the ordinary 
time for customers to receive their own income ; 
and upon the well-known trait of human nature, 
that goods will be purchased more freely if there 
is no demand for immediate payment. 

The system causes a great saving in the use 
of small change, and it secures a somewhat more 
intimate relation between merchant and cus- 
tomer. Where pass-books or some other per- 
manent memorandum of sales is kept in the 
hands of the customer, it affords an opportu- 
nity for a survey of the general expenditure 
which may result in judicious readjustment. 
But the system is subject to grave abuses. Mer- 
chants have difficulty in determining whether 
their various customers should be given credit, 
and, if so, to what extent. Dishonest debtors 
and others whose ventures prove unfortunate, 
so that they are unable to pay their accounts at 



248 ECONOMICS 

the time stipulated, bring heavy losses. As an 
insurance against such losses, merchants are 
obliged to charge higher prices for their goods. 
Their irregularity in collecting such debts makes 
it difficult for merchants to meet their own obli- 
gations. Even when there are no errors of 
judgment from the merchant's standpoint, in 
the giving of credit much harm is often done by 
the practice. Customers gradually find them- 
selves limited to the particular stores at which 
their credit is good, and so lose the advan- 
tage from an inspection of the entire market. 
Higher prices are paid because of the risks and 
expenses of collection. Unexpectedly large 
accounts face the customer when the time for 
their presentation appears, and if they are paid 
promptly, the result is often an unbalanced and 
irregular distribution of income. The experi- 
ence of cooperative stores indicates that a sav- 
ing of from ten per cent upwards is possible by 
the introduction of a strictly cash system accom- 
panied by economies of retail trade which it 
permits. This form of credit, though it has 
assumed vast proportions, is therefore of doubt- 
ful utility. 



THE ORGANIZATION OF CREDIT 249 

The next form of credit, in point of general 
use, is the bank account. Money or representa- 
tives of credit are deposited in the bank and 
drawn upon to meet current needs. The man 
who works for a salary frequently deposits in 
full the check which he receives for the month, 
drawing upon it subsequently for all the various 
bills of the previous month and for such items 
of the current month as require ready cash. In 
this way he avoids the necessity of handling 
any considerable share of the money which he 
earns. The instrument used in withdrawing 
money from the bank, or transferring credit to 
others, is the bank check. It is a very brief 
and informal order, bearing a date and directing 
the bank to pay to the person named or to his 
order a specified sum. The following is the 
usual form : 

No. 199. New York City, Jan. i, 1896. 

Centennial National Bank. 

Pay to the order of IVilUam Jones 

Fifty. ^ Dollars. 

$ SOr^y Richard Palmer. 



250 ECONOMICS 

For the convenience of the user blank checks 
are usually bound together, each with a stub 
attached with blanks for number, date, name of 
person in whose favor the check is drawn, 
balance remaining before check is drawn, 
amount of check, balance after deducting check, 
and for the amount of any deposits. 

The use of checks by private persons in ordi- 
nary business transactions is much more gen- 
eral in England and America than in the 
countries of continental Europe, where it is 
more customary for small depositors to apply 
at the bank in person when money is needed. 
Bank credits are an economy of the circulating 
medium, varying in extent with the length of 
time between the drawing and the presentation 
of checks. The system secures greater safety 
than the practice of hoarding money at home or 
carrying it about the person. It enables the 
community to utilize a greater proportion of its 
spare cash, since the banks, as has been ex- 
plained, need not keep on hand all the money 
against which depositors are entitled to draw. 
Most important of all, from the standpoint of 
the individual depositor, is the personal conven- 



THE ORGANIZATION OF CREDIT 25 1 

ience in making payments. Checks may be 
sent through the mail or by messenger with 
entire safety, since lost checks, if reported by 
number to the bank upon which they are 
drawn, may be refused payment. Checks need 
not be presented at the bank where the money 
is deposited, but will be paid at any bank where 
the drawee is known. A person who receives 
in the course of the day checks from various 
sources upon different banks, may deposit them 
all to his own credit in the bank where his 
account is kept. 

This thorough organization of private busi- 
ness credit is of great economic importance. 
The volume of business may be very much 
more extensive and complicated than under a 
system of cash payments. It permits many 
transactions which would not be possible at all, 
if the surplus cash of individuals were not thus 
collected into larger funds, and if the check 
system did not insure easy transfers of credit. 
The abuse to which it is subject in the too fre- 
quent use of checks for petty amounts is easily 
controlled by the practice of charging a small 
fee for exchange. This practice is adopted 



252 ECONOMICS 

most frequently in the case of isolated banks 
which do not have easy communication with 
other banks, and especially when exchanges be- 
tween the community of which it is the credit 
centre and the other communities with which 
it deals do not balance each other. In such 
cases the bank must send or receive money and 
a charge must be made to cover the cost. 

The next step in the development of credit is 
the organization of a system by which banks 
may easily adjust their balances with each other. 
Under the check system each bank will receive 
during the day the checks of many other banks, 
and its own will be widely distributed. Since 
such a multitude of private persons are con- 
cerned in these transactions whose credit is 
continually shifting, and since some of them 
may have overdrawn their accounts, it is essen- 
tial that each check should promptly reach the 
bank against which it is drawn in order that its 
character may be ascertained. This is accom- 
plished through the Clearing House, or associa- 
tion of banks. In an incredibly short space of 
time, after the presentation by each bank of the 
checks which it has cashed for other banks, its 



THE ORGANIZATION OF CREDIT 253 

own liability for checks cashed elsewhere is 
ascertained and a statement of the balance, 
whether favorable or unfavorable, is presented. 
This balance may be settled in money or in 
clearing-house certificates. The clearing house 
is thus a bank which deals in the credit of other 
banks, and its economy lies in the same direc- 
tion as that indicated for banks in general. 
The real saving of time and of the necessity for 
using money is most fully revealed in the clear- 
ing-house transactions of the large cities. Only 
a minute fraction of the total business transac- 
tions finally requires the use of money. By far 
the greater part consists of transfers of credit. 

The word "draft" is commonly used to desig- 
nate the order drawn by one bank upon another. 
It differs in no respect from a personal check, 
except that it is preferred for exchange between 
cities, because it is easier as a rule to learn the 
standing of a bank than of an individual ; but 
even this is a question of degree only, and there 
are many private persons whose financial stand- 
ing is so well known that their personal check 
would be accepted as readily as the draft of any 
metropolitan bank. 



2 54 ECONOMICS 

The organization of international credit is 
earlier in time than the elaborate banking sys- 
tem just described. The occasion for it has 
been already explained in the chapter on the 
"Distribution of Products." ^ In the complexity 
and vast extent of modern commerce it rests 
upon credit in an ever increasing extent. Bills 
of exchange are bought and sold as are other 
articles of international commerce, and their 
rates vary with the exportation and importation 
of goods. If the exchange of products between 
two countries is in equilibrium, exchange will 
be at par, i.e., it will be as easy to pay a debt 
in the foreign country as at home. If more 
goods are imported so that the balance of trade, 
as the saying is, becomes unfavorable, the rate 
of foreign exchange will rise until it reaches a 
point at which it is more profitable to ship gold 
abroad than to buy the foreign bills. Inversely, 
if more goods are exported so that there is a tend- 
ency for gold to flow in from foreign countries, 
those who have payments to make abroad will 
find an advantageous rate of exchange, since 
there will be in the foreign country many persons 

1 See Chapter X. 



THE ORGANIZATION OF CREDIT 255 

eager to accept the bills of exchange which to 
that extent relieve the demand for gold. 

Another form of credit which does not imply 
the existence of banks, though it furnishes to 
them a large part of their business, is the bor- 
rowing of capital on promissory notes for a stipu- 
lated time, and at a stipulated rate of interest. 
By this means capital is transferred from owners 
who have no use for it, or who desire only a 
regular income from it of moderate amount, to 
others who believe themselves to be in position 
to use it advantageously. This ability to bor- 
row depends upon the credit of the borrower, 
which in exceptional cases has no other founda- 
tion than personal character of the kind that 
inspires confidence. As a rule, some security 
is required. The wealth pledged as security 
need not, however, be withdrawn from active 
production, so that the borrower is able to in- 
crease his available capital by the extent of his 
credit. Closely analogous to this variety of 
credit is the formation of partnerships in which 
capital is furnished by persons who do not other 
wise engage in the proposed enterprise. Before 
it was permitted to loan money at interest in 



256 ECONOMICS 

England, it was very common to form partner- 
ships of this kind in which owners of capital 
obtained a share of the profit. There was 
thought to be no impropriety in securing such 
return for the use of capital, since the capital 
shared in the risk of the enterprise. By both 
of these methods the immediate control of capi- 
tal is placed in the hands of business men of 
greater efficiency and skill than its original 
owners possess, or, at least, in the hands of men 
who are willing to employ it actively in com- 
merce or industry. There is no certainty that 
ability in industrial management will accompany 
the ownership of capital, particularly where laws 
permit the inheritance of wealth. The general 
welfare of society is promoted by a system of 
credit, which permits its employment to pass 
into the hands of such persons as find them- 
selves able to make the best use of it. There 
is at present no better test of this than the rate 
of interest which borrowers are respectively able 
to pay. 

Banks deal in this kind of credit as a part of 
their regular function. Whatever portion of 
their deposits is not needed as a reserve fund for 



THE ORGANIZATION OF CREDIT 257 

the transaction of daily business is free, for loans 
at interest, and their facilities for learning the 
financial standing of their customers gives them 
unusually good opportunities for lending their 
own capital to advantage. But the business is 
by no means confined to banks. Private indi- 
viduals may lend directly, or they may lend their 
savings through special associations which pay 
interest upon sums intrusted to them. Most 
conspicuous among these are the savings banks 
and the building associations. Life-insurance 
companies also afford an excellent opportunity 
for the safe investment of moderate amounts. 
In the aggregate the funds collected by these 
various agencies are very large, and a heavy re- 
sponsibility for their judicious employment rests 
upon their officers. 

Two additional forms of credit may be con- 
sidered together, as their economic character is 
identical, whatever their legal and political differ- 
ence. Bank-notes and government issues of 
paper, or of subsidiary coinage which is valued 
at more than the worth of the bullion, are alike 
representatives of credit. If convertible in- 
stantly upon demand into standard money, they 



2 58 ECONOMICS 

are the equivalent of money, in the same way 
that checks are the equivalent of wealth deposited 
with the banker. They permit an economy of 
more expensive kinds of money and are there- 
fore useful. For the same reasons that the 
banking system releases a portion of the capital 
of a community for productive purposes, repre- 
sentatives of credit virtually increase the cur- 
rency by whatever amount of money need not 
be kept constantly on hand for their redemption. 
If not legally convertible into standard money, 
they may still circulate side by side with it, pro- 
vided the quantity is not excessive. Whenever 
the total quantity of money, including the rep- 
resentatives of credit, exceeds the demands of 
business, the high prices which result will ne- 
cessitate an exportation of money. Naturally it 
is the standard money that will be driven out of 
circulation.^ If the inflation continues after the 
diminution of the currency caused by the disap- 
pearance of the money which can be used abroad, 
prices may continue to rise to any extent, as the 
international regulator of prices has been ren- 
dered inoperative. There is no other remedy ex- 

1 See p. 228. 



THE ORGANIZATION OF CREDIT 259 

cept the calling in of a portion of the excessive 
issues until there is again an equilibrium be- 
tween the volume of business and the volume of 
money. 

Bank-notes resemble ordinary promissory 
notes, but are without interest and payable 
upon demand of the holder. Where there is 
no arbitrary restriction upon the issue of such 
notes, the amount which any particular bank 
can keep in circulation will depend chiefly upon 
the average time allowed to lapse between issue 
and presentation for payment. This in turn 
depends in part upon the credit of the bank and 
the willingness of people in general to receive 
the bank-notes as money, and in part upon the 
requirements for business for a medium of ex- 
change. If money is scarce, the bank-notes 
will remain longer in circulation, the credit of 
the bank remaining the same. This is equally 
true of government issues, if they are payable 
on demand, and there is ready access to the 
places where they may be presented. This ele- 
ment of the currency is a useful one as a means 
of assuring greater elasticity than is provided by 
the use of coin, and its usefulness is greatest 



260 ECONOMICS 

when the banks, which are entitled to issue 
notes, are most widely distributed and thus 
most directly in contact with actual business 
demands.^ 

1 The dangers from such an elastic currency should not be 
overlooked. Professor Hadley thus describes what may occur. 
" If it becomes easy to obtain the accommodation at the banks, 
a large number of transactions will be made on credit. The 
checks which result from the creation of such bank credit fur- 
nish a medium of exchange almost as efficient as money. The 
over-abundance of a medium of exchange in this form will 
make it easier to get money than it was before. This will tend 
to raise prices. . . . This . . . may continue until the liabilities 
of the banks become disproportionate to their reserves. When 
the public perceives this, there is a sudden shock to confidence 
and a withdrawal of accommodation which causes far greater 
distress than would have resulted had the facilities for pay- 
ment by credit been less elastic at the outset." — Economics, 
pp. 246-247. 



CHAPTER XIII 

THE ORGANIZATION OF INDUSTRY 

In a previous chapter on the making of goods 
we made a broad survey of the economic activi- 
ties of human society, describing the making 
of goods as the entire series of activities by 
which man secures from his surroundings the 
satisfactions which his nature demands. The 
brief account given in that chapter was from 
the outside only, as we might describe the in- 
dustrial activity of a colony of bees. We have 
now gone far enough into the explanation of 
wealth to enable us to view the industrial or- 
ganization of society from the inside and to 
attempt an analysis of the industrial factors. 

Human industry, as a whole, is like a great 
stream which flows continuously under the 
management of man from its sources in the 
natural forces to its destination in the supply of 
the wants of man. The stream is made up of 
products continually changing as it rolls on, 
261 



262 ECONOMICS 

until, at its mouth, it discharges only products. 
Four elements are clearly distinguishable as we 
watch it : the unfinished products; the physical 
energy which makes their motion and trans- 
formation possible ; the human labor which 
transfers the energy to the material product, 
though it is itself a form of that energy ; and 
the intelligence which directs the general 
course of the stream. It is clear that all of 
these four elements are essential to the indus- 
trial product. Let us begin with the unfinished 
products themselves. 

As soon as they are seized upon by man, 
however much they may resemble natural prod- 
ucts in appearance, they are in fact industrial 
products. On the other hand, however much 
they may resemble goods for immediate con- 
sumption, they serve a different purpose in that 
they are to be employed in further production. 
They may be regarded as unfinished or future 
goods. The satisfaction which their produc- 
tion was intended to meet will not be realized 
until the commodity which is to be consumed 
has actually been produced. The plough, the 
wagon, and the reaper, in so far as they are used 



THE ORGANIZATION OF INDUSTRY 263 

in the production of wheat, may be regarded 
as wheat not yet ready for consumption. They 
have no reason for existence except as they 
bring nearer that for the production of which 
they were themselves produced. 

To be clearly distinguished from these future 
goods are the present goods which minister 
directly to the satisfaction of human desires. 
Food, clothing, and fuel used in protection 
against cold are obviously present goods. 
Commodities which satisfy higher desires — as 
paintings, ornaments, and articles of household 
furniture — are of the same kind.^ The spoken 
oration, the musician's notes, and the plunge of 
the surgeon's knife are goods in the economic 
sense, and furnish excellent examples of the class 
of goods under consideration. The goods which 
have ultimately taken form as present goods, 
have been at various stages of their production 
future goods. They have become present goods 
through the operation of productive agencies. 
They were products; they have become produce.^ 

1 Clark, Philosophy of Wealth, Chapter I. 

2 Patten, " Fundamental Idea of Capital," in Quarterly 
Journal of Economics, Vol. III., p. 193. 



264 ECONOMICS 

The future goods are of two distinct kinds. 
There are those which will reappear visibly in 
the finished product, as wood, cotton, flax, and 
coloring matter in cloth, leather in shoes, etc.;^ 
and those which will not thus reappear, as coal, 
bleaching material, lubricants,^ and the build- 
ings which have been required in the produc- 
tion. Goods of the first-mentioned class are 
themselves on the way to the goal of consump- 
tion. Those of the second are aiding in the 
transformation of other future goods into pres- 
ent goods. If the produce of industry under 
consideration be bread, the labor that has been 
expended in its production has taken form on 
the one side, at different stages, as plant food, 
wheat, flour, and dough ; and the other as im- 
provement on land, agricultural machinery, 
wagon, railroad, flour mill, and baker's oven. 
The latter are fundamentally of the same eco- 
nomic character as the former.^ Future goods of 
the first class are called by Clark passive capital, 

1 Andrews, Institutes of Economics, p. 49. 

2 Ibid. 

^ A plough is so many loaves of bread partly made, while a 
loom and the engine which moves it are partly made coats; 
that is, society having determined to make some more bread 



THE ORGANIZATION OF INDUSTRY 265 

those of the second active capital.^ These prod- 
ucts of human industry which owe their exist- 
ence and their value, not to their power to 
satisfy immediately human desires, but to the 
great fact of the efficiency of serial production, 
are future goods. 

Though material commodities only are ordi- 
narily included in the term " future goods," it 
should be pointed out that there are other pro- 
ductive agencies which are entirely analogous 
in their action. Andrews refers to some of 
them as "unembodied inventions," and cites 
the knowledge of chemical combinations used 
in the arts, etc. The patterns of a stove manu- 
facturer, often very valuable, are of course fut- 
ure goods ; yet if the patterns themselves were 
destroyed, they could usually be replaced at 
nominal expense by one who remembered their 
form. The result of an invention, whether 
of a pattern, a chemical combination, or a me- 
chanical process is only under very exceptional 

and coats, is so far along in the work that it has made a plough, 
a loom, and an engine to propel it. — Patten, see p. 263. 

1" Capital and its Earnings," in Publications of the American 
Economic Association, Vol. III., No. 2. 



266 ECONOMICS 

circumstances wholly embodied in a physical 
form. The improvement of agricultural land 
may take such tangible form as to be easily rec- 
ognized as a material product — a future good ; 
or it may consist simply in an improvement in 
the quality of the soil. Labor may be expended 
in the erection of agricultural stations in order 
to increase production. The result is then 
clearly a future good — a product of industry. 
Essentially the same thing is done when labor 
is expended in the training of laborers to 
greater efficiency. The qualities of man are 
improved as were those of the soil in the illus- 
tration above given. Finally, labor may be 
expended in the production of future goods, 
such as machinery, tools, and factory build- 
ings. It is better to reserve the term "future 
goods" for these material commodities, using the 
broader term "capital" to designate the results 
of all labor exerted before that which performs 
the final act of transforming the future into a 
present good. Capital is embodied labor, but 
it is labor expended beforehand in order to 
increase the produce. Viewing the production 
of wealth, rather than its consumption, looking 



THE ORGANIZATION OF INDUSTRY 267 

not upon man's pleasures, but upon the indus- 
trial organization — we thus get a clear idea of 
capital and its function. It does not include 
the means of subsistence in the hands of their 
final consumers, or any commodities which will 
directly satisfy the wants of man and are desired 
by men on their own account. 

Whether capital is a productive agency, is a 
question of economic theory over which a 
severe struggle has continued to the present 
day. The least that can be claimed for the 
productive power of capital is that the produc- 
tive agencies are far more efficient where there 
is a relatively large stock of future goods in 
existence, where the serial method of produc- 
tion is in full vogue, where a portion of the 
labor necessary to satisfy a man's desires is 
exerted long in advance of the period when the 
commodity is to be consumed.^ 

It is evident that a society which maintains 

^The value of the unfinished commodity, the product of in- 
dustry, depends upon the distance which separates it from the 
finished stage. When products are exchanged for produce, it is 
always at a certain advantage to the holder of the former, pro- 
vided he is able and willing to sacrifice thus a lower degree of 
pleasure in the present for a higher in the future. 



268 ECONOMICS 

a judicious proportion between the quantities 
of future and present goods will add thereby 
greatly to the satisfactions which it may enjoy. 
But it is essential further that the various 
classes of future goods should bear to each 
other a certain proportion determined in each 
case by the requirements of the industrial or- 
ganization. If the object be to bring coal to 
the consumers, the future goods called into 
requisition are, among others, mine machinery, 
road bed, and rolling stock. Individual pro- 
ducers sometimes put too large a portion of the 
available energy into the construction of rail- 
ways, leaving not enough free for the production 
of machinery or for the mining industry itself.^ 
The expenditure of labor too long beforehand 
is not to be justified. Production will be most 
efficient when the quantities of labor devoted 
to the various classes of future goods are most 
nicely adjusted. 

The distinction between circulating and fixed 
capital has long been current and is useful for 

1 Panics have sometimes ensued when too much of the 
national capital is in railroads. It becomes under such circum- 
stances both fixed and specialized. See next two paragraphs. 



THE ORGANIZATION OF INDUSTRY 269 

certain practical purposes. Circulating capital 
consists of such future goods as fulfil the whole 
of their office, in the production in which they 
are engaged, by a single use ; fixed capital of 
such as exist in any durable shape, and the use 
of which in production is spread over a period 
of corresponding duration. ^ Much of what is 
ordinarily classed as circulating capital is, how- 
ever, excluded entirely from the category of 
future goods, and consequently of capital as 
above defined. Nothing is more common in the 
political economy of the wage-fund period than 
discussions as to whether laborers suffer from 
the transformation of circulating capital into 
fixed capital. This discussion has no mean- 
ing unless we understand by circulating cap- 
ital mainly subsistence. But food and clothing 
are present goods — not capitalistic products — 
and they should not be reckoned as capital. The 
line between fixed and circulating capital has 
always been a very uncertain one, and since the 
line which separates future from present goods 
can be more distinctly drawn, the utility of the 
older distinction is questionable. If it is re- 

1 Mill, Principles of Political Economy, Bk. I., Chapter VI. 



2/0 ECONOMICS 

tained, and we seek an illustration in steamship 
transportation, we would place the vessel itself, 
as well as the permanent offices and the docks 
of the steamship company, on the side of fixed 
capital; while the fuel consumed in the steamer, 
the supply of provisions necessary for the voy- 
age, ^ and all those portions of the equipment of 
vessels, docks, or offices which need to be con- 
tinually renewed, furnish the circulating capital. 
The paint renewed at every port would figure 
in the circulating capital of the steamship line, 
though it would be less "circulating" than 
the fuel which lasts in the furnace but a few 
minutes. 

Specialized capital, by which is meant those 
future goods which, to avoid waste, must be 
carried forward to a particular goal, as print- 
ing-presses to the production of books and 
newspapers, steam engines to some form of 
production in which steam power is required, 
and steel to the form of edged tools, rails, 

1 Until they are prepared for the table and actually placed 
before passengers, when they become present goods, and con- 
stitute an integral part of the " good " for which the passage 
money has been paid. 



THE ORGANIZATION OF INDUSTRY 2/1 

steel-plate, etc., is distinguished from free 
capital, which may with almost equal economy 
be employed in any one of many different 
kinds of production. This distinction is also 
purely relative. A factory which can be 
transformed at small expense into one suited 
to the production of a different commodity, 
is less specialized than one which, if the 
transformation were necessary, would require 
a greater outlay in effecting required changes. 
Individuals suffer at times from changes in 
demand which leave them in possession of 
specialized and useless capital. Production 
will be in this respect most efficient when 
changes are so successfully anticipated as to 
prevent at such points a too great preponder- 
ance of specialized capital over that which is 
free. 

If capital in its origin is not a result of 
saving, but rather a result of the adoption of 
a new and more efficient method of produc- 
tion, then it is evident that it is increased, 
not by reducing consumption, but by turning 
the productive capacity of society into new 
channels. An addition to the stock of capi- 



2/2 ECONOMICS 

tal is an incidental result of the new activity, 
not its cause. In apparent conflict with this 
statement of the relation of capital to the 
growth of industry are the first two of Mill's 
four fundamental propositions concerning capi- 
tal, viz. : that industry is limited by capital ; 
and that capital is the result of saving. But 
the word " saving " is used by Mill in a tech- 
nical sense, denoting not necessarily abstinence 
or privation, but merely '' excess of produc- 
tion over consumption." The essential ele- 
ment is even here the activity which calls 
the new products into being. It is of course 
implied that they then be devoted to the end 
for which they were produced and not to some 
other, — that they be ''saved " from loss, waste 
and unproductive consumption ; but it is wholly 
irrelevant to say that they are a result of this 
saving.^ Non-destruction cannot be regarded 

1 " If a child asked whence chickens came, and was told 
that to produce chickens he must refrain from eating eggs, 
we should be justified in regarding the answer as excellent 
advice, but as an exceedingly absurd explanation. We are 
not a whit better satisfied by the train of reasoning which 
makes saving the original cause of the formation of capital." 
— Gide, Pruiciples of Political Economy, Amer. ed., p. 139. 



THE ORGANIZATION OF INDUSTRY 2/3 

as the origin of anything. Nor is it true 
that industry is limited by capital in any 
sense which is inconsistent with the proposi- 
tion that sufficient capital is always forthcom- 
ing when the natural forces and human energy 
are directed into more productive channels. 
The limitations are imposed by the lack of 
such energy and non-utilization of such forces. 
It cannot be too strongly insisted upon that 
under normal conditions, i.e.^ when the quan- 
tities of the various kinds of capital are pro- 
duced in the right proportion, the increase of 
capital involves no reduction in the quanti- 
ties of present goods produced, that there is 
no diminution of enjoyment, that there is no 
necessary privation or sacrifice other than 
that connected with the labor involved in the 
production. Looking upon the industrial or- 
ganization from a social and purely objective 
standpoint, we may recognize clearly enough 
that these advantages from the use of capital 
are not purchased at the cost of any reduction 
of enjoyment. At every stage, capital — that is 
to say, machinery, raw materials, unfinished 
goods, improvement on land, increased abilities 



2/4 ECONOMICS 

in men — these are produced by the cooperation 
of the human and the natural forces. They 
do not add to man's satisfactions directly, 
but neither do they subtract from them. In- 
directly but continuously they do aid in satis- 
fying desires. Contemporaneously with their 
own production they are changing into pres- 
ent goods, or are increasing the quantities of 
present goods, at man's disposal. Since the 
very beginning of this process there has been 
no necessity for saving as an act of production. 
Saving is the means by which the individual 
may increase the amount of his own income, the 
means by which he may influence the distribu- 
tion of wealth. It deserves attention, therefore, 
in the study of distribution. Unfortunately 
there is a large class made up of those who are 
unwilling or unable to save for themselves, who 
do not adapt themselves to the more efficient 
methods of production in vogue, but steadily 
exchange their share in the future goods which 
they help to produce for such as are able to sat- 
isfy immediate wants. While society consists 
thus of two classes, those who save and those 
who do not, the distribution of wealth will be 



THE ORGANIZATION OF INDUSTRY 2/5 

greatly in favor of the former class. This income 
which they receive, because of the failure of the 
latter class to act in conformity with the newer 
conditions, is so much deducted from the total 
product of industry before any division among 
those who have actively cooperated in produc- 
tion can take place. 

Money is circulating capital of a unique kind. 
In any particular production the money em- 
ployed fulfils the whole of its office by a single 
use, yet the money itself may exist in a durable 
shape, and its entire service to society may be 
spread over a period of longer duration than 
that of almost any form of fixed capital. In the 
popular mind the significance of money in the 
industrial mechanism is usually grossly exagger- 
ated. Its total quantity does not measure in 
any sense the aggregate wealth of the country, 
nor does it stand in any fixed relation to its 
stock of capital. The importance of the money 
of a country is somewhat greater than that of 
the weights and measures in general use, but 
its function does not differ materially from 
theirs. Money is used in exchanging goods, as 
railway cars are used in transporting them. 



2/6 ECONOMICS 

Both money and cars are capital, but neither 
has any exclusive or peculiar claim to the title. 
When it is said that money is needed to de- 
velop the resources of a particular section of 
the country, it is almost always capital of other 
kinds than money that is really lacking. If 
the supply of money is really short, it will be 
attracted from other countries as soon as pre- 
vailing high prices show that there is a deficiency. 
But there is no automatic method by which the 
supply of capital may be increased, since a high 
rate of interest does not necessarily accompany 
a deficiency of capital. If the deficiency makes 
itself felt as an obstacle to the development of 
some industry, then the rate of interest will 
rise in such a way as to attract the necessary 
capital. The need of future goods is recognized 
only gradually and on the actual initiation of 
new enterprises. That they are provided is an 
indication of the healthy growth of industry. 
The increase of capital augurs well for further 
development. An increase of money beyond 
that amount which the law of international 
prices allows is a disadvantage, and brings its 
own remedy. Society should be much more 



THE ORGANIZATION OF INDUSTRY 2// 

ready, therefore, to bring about the conditions 
that call for an increase of capital than to in- 
crease artificially the money supply. 

We may now turn our attention to the second 
of the productive energies enumerated at the 
beginning of this chapter. Physical energy is 
supplied by nature in an inexhaustible amount. 
No economist thinks, therefore, of attaching any 
importance to it as a productive agency. But 
it so happens that most of its available forms 
are dependent upon one of nature's gifts, viz., 
land. Industry can be carried on only upon 
land, and its products all find their origin in 
land, for by the term we include so much of 
the crust of the earth as furnishes to industry 
any of its original materials. There is no get- 
ting access to the natural forces under our social 
institutions except through land ownership or 
rental. Figuratively speaking, therefore, land 
is the economic form of physical energy. It is 
nature's contribution to industry. It includes 
rocks and soils, timber, grass, and running 
streams, — all the forces of nature utilized by 
man in any branch of human industry. The 
materials of industry are drawn from land, the 



2/8 ECONOMICS 

possibility of industry depends upon the con- 
tinued utilization of those forces which are em- 
bodied in land and its products. 

If at any given time an economic society has 
at its disposal much unoccupied land suitable for 
industry, it has not merely standing room for a 
larger number of workers, but also the physical 
forces supplied by the sun's rays which fall 
upon it, by the coal which may lie buried be- 
neath it, by the germinating power of its soils, 
and even by the animals which feed upon its 
grasses and grains. The possession of land — 
at least the privilege of working upon it — is 
the first consideration of economic society. 
Without it man cannot exist. Any part of 
the entire product of industry short of that 
necessary to bare maintenance might be ex- 
acted by those who control it if they themselves 
could become independent of other equally 
essential agencies, — an impossible condition. 

It has been shown that land considered as 
a productive agency is a more comprehensive 
term than land in the ordinary use of the term ; 
but in certain other directions it is more re- 
stricted than in popular usage. It does not 



THE ORGANIZATION OF INDUSTRY 2/9 

include any industrial product. When we speak 
of land as a source of income, we usually include 
many improvements, some recent, and others, it 
may be, very remote. Land, sharply distin- 
guished from capital and other productive agen- 
cies, however, cannot include other than natural 
products and forces. As a French economist 
has said,^ we need some ground to stand on, 
rather more to lie down on, vastly more to feed 
our flocks and build our factories. We need 
further the cooperation of the various forms of 
physical energy, and this, too, depends upon the 
possession of land. 

An increase in the supply of land thus under- 
stood must always accompany any considerable 
extension of industrial activity, but it by no 
means involves necessarily the opening up of 
new land areas. Any discovery which leads to 
a new development of physical energy from the 
natural products, and forces now available, is for 
all practical purposes an increase in the supply of 
land. Increased command over the resources 
of nature on a given area permits an extension 
of industry, just as does the occupation of new 

1 Gide, Principles of Political Economy, Amer. Ed., p. 99. 



28o ECONOMICS 

land. Except in new countries where good 
land is still unoccupied, an increase of land 
means, as a rule, a better use of the possibilities 
of production lying in the land already occupied, 
but not utilized in the most productive manner. 
Partly by the discoveries of science, partly by 
the diffusion of skill, this process of increasing 
the usefulness of land goes constantly forward, 
and may be indefinitely continued long after 
there is no longer any additional land area for 
occupation. 

The two remaining productive agencies are 
labor and intelligence. Those two are insepa- 
rably connected in man, as land and capital are 
inseparably connected in external nature ; but 
they are distinct in function. Muscular activity 
presupposes a certain degree of rational direc- 
tion, while the highest degree of mental activity 
remains subject to the necessity of receiving 
bodily support, in which is included muscular 
action. The term ''labor" is sometimes used in 
a broad sense to designate all human exertion 
directed toward productive ends. Even in its 
broadest use, however, labor cannot include the 
mental faculties themselves ; it can refer only 



THE ORGANIZATION OF INDUSTRY 28 1 

to the bodily activity which is a condition to the 
exercise of those faculties. Intelligence is 
clearly to be distinguished from the labor which 
it directs. It is true that a man's labor must 
be guided in part by his own intelligence, but it 
introduces needless confusion to class intelli- 
gence, therefore, as a form of labor. In the 
study of production it is important to discover, 
not how many agencies are united under the 
control of the individual producer, but what 
agencies there are. Not how many different 
sources of income are open to a single person, 
but what is the explanation of the possibility of 
income, — what are the active forces that unite 
to-produce wealth. 

Man's energy, both mental and physical, is 
to a considerable extent dependent upon outer 
conditions. These must not be ignored. The 
efficiency of production is determined in very 
large part by the amount of human energy 
which capitalists and laborers bring to their 
task. Attention has already been called to the 
indirect influence of climate on production 
through its influence on man's energy and in- 
dustrial activity, It is a matter of common 



282 ECONOMICS 

experience that greater endurance, heartier re- 
sponse to unexpected demands, and more vigor- 
ous prosecution of new and uncertain ventures 
may be expected from a people whose climatic 
surroundings are healthful and stimulating than 
from those whose lives are spent under unwhole- 
some conditions. Greater energy is possible 
where the working day is of reasonable length, 
where the laborer has a direct interest in the 
product of his industry, where the State is 
active in promoting favorable conditions of life. 
The degree of energy which we may expect to 
see displayed in any community depends thus 
partly on outward physical conditions, partly on 
social and industrial conditions which the people 
of the community themselves create. Every- 
thing which contributes to the hopefulness and 
cheerfulness of the laborer, everything which 
adds to his physical strength and his mental 
power, because they have these results, deserve 
mention in any enumeration of the productive 
agencies. If they are found to be incapable of 
modification by man, they should be intelligently 
utilized. If they are found to be within the 
sphere of man's influence, they should be sys- 



THE ORGANIZATION OF INDUSTRY 283 

tematically developed and encouraged to the 
end that the highest degree of human energy 
may be secured. 

The real importance of labor has been much 
obscured by two equally persistent, but equally 
vain, attempts to unduly exalt its significance. 
The attempt has been made, first, to find in the 
amount of labor that has been expended upon 
the production of an article an explanation of 
its present value ; but the attempt has failed to 
supply either a satisfactory economic theory 
of value or a practical guide to its measure- 
ment. It has been attempted, secondly, to 
show that wages are, or shotdd be, in proportion 
to the actual sacrifice involved in the labor for 
which wages are paid. Without anticipating 
further the discussion of distribution and of 
individual income, it may be said that the sacri- 
fice at most measures the cost of such labor to 
the laborer, not its value in the market, and can 
account therefore only for a minimum share in 
distribution — a minimum to which any consid- 
erable body of producers seldom sinks. 

Labor, then, — bodily exertion involving some 
degree of sacrifice, either of pleasure or comfort, 



284 ECONOMICS 

— is an essential in all wealth production. 
Labor in all its forms either produces or resists 
motion. Displacement of material bodies, or a 
rearrangement of their parts, is the utmost that 
labor can accomplish.^ It is seldom that the 
entire series of motions which the production 
calls for is accomplished by human labor alone. 
When bodies have been placed in the proper 
situation, natural forces operate through ma- 
chines in the same way as through the human 
body. Invention is continually transferring 
new portions of the series to machinery, but 
the necessity for labor remains. The increased 
use of machinery has not, and probably will not, 
cause a sufficient increase in the amount of 
wealth produced to meet the new wants devel- 
oped with social progress. We may look for 
fewer hours of labor each day for those whose 
working day now greatly exceeds the limits of 
efficiency ; we may look for a release from bru- 
talizing forms of labor ; but it is scarcely pos- 
sible that there will be a decrease in the 

1 Man has no other means of acting on matter than by mov- 
ing it. — Mill, Principles of Political Economy, People's Ed., 
p. 16. See also Gide and Fawcett on this subject. 



THE ORGANIZATION OF INDUSTRY 285 

aggregate demand for labor, a decrease, in 
other words, in the advantage which society 
will realize from the possession of a high de- 
gree of human energy ready to be applied to 
industrial labor. 

Looking again upon labor as a moving of 
material bodies, it will be seen that its effi- 
ciency depends upon : first, the quantity of 
motion produced ; second, the precision of the 
motion ; third, the certainty that the motion will 
be produced at the right time and with suffi- 
cient rapidity ; fourth, the certainty that the 
motion will be in the right direction, or, more 
generally, that of several possible motions ex- 
actly the right one will be made. The quan- 
tity of motion which the individual laborer can 
produce — the number of times that he can re- 
peat the series of motions for which his posi- 
tion in the industrial mechanics calls — depends 
upon the quantity and quality of his food, on 
the clothing and shelter with which he is pro- 
vided, and on the other conditions of a high 
degree of human energy, some of which were 
enumerated in the paragraphs on that subject. 

Precision, promptness, rapidity, and the de- 



286 . ECONOMICS 

gree of judgment necessary to guide the work- 
man in the selection of tools, and of the right 
use to be made of them at the moment when 
they are to be used, — these are qualities which 
require training and systematic encouragement. 
We are not concerned here with the intelli- 
gence necessary to invention, to discovery, or to 
that kind of superintendence which requires 
frequent decision of new questions, least of all 
with the intelligence necessary to initiate new 
industries or to modify seriously the methods 
of production employed in those already estab- 
lished ; but with the qualities necessary in any 
efficient labor, even when directed by others. 
Whatever may be said of the higher types of 
intelligence, it is certain that by proper train- 
ing these qualities may be developed in every 
class to some extent. The industrial efficiency 
of the nation would be vastly increased if by 
schools of manual training ; by technological 
schools; by courses in the public schools in 
cooking, sewing, carving, drawing, singing; by 
systematic courses in athletics ; and by every 
other possible means the future workingmen 
— that is to say, all women and men — were 



THE ORGANIZATION OF INDUSTRY 28/ 

taught more completely the use of their bodies, 
were trained to keep their organs under better 
control, and to move them with grace and pre- 
cision, and, when necessary, with promptness, 
rapidity, and force. The attempts at this kind 
of instruction have been numerous, but seldom 
continued for a sufficient time, or introduced 
over a sufficient area to afford any test of its 
efficacy. We need a State policy of popular 
education, framed with this pressing industrial 
need in view, applied persistently without too 
careful regard to local prejudices, and including 
adequate provision for systematic training of 
the teacliers in the courses which they would 
be expected to add to those already given. 

It is not sufficient for wealth production that 
motion be imparted to particles of matter, even 
if that motion be well adapted to accomplish 
its immediate end. What bodies shall be 
moved ? What degree and what kind of mo- 
tion shall be applied J What combinations of 
motion are necessary to produce the desired 
commodity ? These questions must be care- 
fully decided before the point is reached when 
labor can be applied in production. Discovery 



288 ECONOMICS 

of the essential relations between the various 
productive agencies, invention of new processes, 
and guidance of the forces utilized are the 
three principal functions of intelligence in pro- 
duction. A modification of the economic en- 
vironment suddenly leaves too much capital 
in one branch of industry, and leaves unused 
opportunity for profitable investment in another. 
It is the function of intelligence to discover 
these facts and to cause a transfer of capital 
and productive power to the new channels. 
Intelligence finds new forms of potential en- 
ergy in nature, discovers methods by which 
waste may be reduced, discovers new sources 
of raw materials and new markets for prod- 
ucts. Industries which were in favorable po- 
sition in every respect for successful compe- 
tition, have at times failed entirely because 
of their inability to dispose economically and 
promptly of the commodities produced. This 
fact would be considered only in the study of 
the distribution of wealth, except for the loss 
entailed on society by this waste of productive 
power. An added degree of intelligence, ap- 
plied at the right place, would complete the 



THE ORGANIZATION OF INDUSTRY 289 

group of agencies operating in these industries 
and render the entire group effective. 

The activity of intelligence always takes the 
form of rendering a decision, as that of labor 
takes the form of producing motion. But just 
as the efficiency of labor depends on many 
circumstances affecting the bodily condition 
of the laborer, so the soundness of the judg- 
ment rendered depends on the physical con- 
dition of the person who renders it. The part 
which intelligence plays in production assumes 
greater importance as the ideals of society be- 
come higher and more complex ; as the stabil- 
ity of credit, the appreciation of future welfare, 
the influence of moral and religious motives, 
become more firmly established. These con- 
ditions, favorable to a higher grade of intelli- 
gence, are as capable of cultivation as are the 
conditions favorable to efficient labor. It is 
possible for society to produce men physically 
capable of energetic and efficient labor ; so, 
also, it is possible to produce men capable of 
organizing and directing their own industry. 
Those who place themselves in opposition to 
liberal public provision for general higher edu- 



290 ECONOMICS 

cation, and for such elementary and secondary 
instruction as shall lead up to it by an easily 
trod path, are favoring a monopoly of the most 
important productive agency in the hands of 
the few whose private funds can supply the 
necessary intellectual training. There is no 
necessity for such a monopoly. The capitalists 
and the class endowed with superior intelligence 
have been identified in economic theories be- 
cause, as a matter of fact, the State has usually 
provided in so niggardly a manner for general 
education of even an elementary character that 
none others than the children of wealthy capi- 
talists could be placed in a favorable position 
for the development of their intellectual powers. 
Even to this day in England, where the older 
political economy arose, although there are 
excellent elementary schools, and though a 
university education is comparatively inexpen- 
sive, there are no regular means provided to 
prepare even the brightest student of the ele- 
mentary school for university study.^ 

1 An important educational problem in England is the re- 
organization of secondary instruction in such a way as to bridge 
over this period. A Royal Commission issued in 1895 a com- 



THE ORGANIZATION OF INDUSTRY 29 1 

We need a more aggressive State policy, not 
merely in elementary education, but in uni- 
versity teaching as well. The systematic 
extension of university teaching to every com- 
munity, by means of public funds, is the only 
completely justifiable policy of higher education 
for the State to adopt. This would not secure 
intellectual equality for its citizens, but it would 
practically insure that all the widely varying 
abihties of the communities should be brought 
to light, that fewer of the intellectual powers 
of society should be wasted, that intelligence 
in production should be contributed by hun- 
dreds, where it is now contributed by scores. 
Intelligence is developed under a system of in- 
equality of opportunity by the unsatisfactory 
method of placing monopoly gains in the hands 
of a small class, thus bringing opportunities 
of culture to its members. It would be devel- 
oped more naturally and completely under a 
democratic system, which, by taxation of mo- 
nopoly gains, by reduction of waste, and, if 

prehensive report on the subject. In America the better class 
of High Schools connect the elementary school directly with 
the State Universities. 



292 ECONOMICS 

necessary, by a voluntary sacrifice of present 
comfort on the part of all citizens, would pro- 
vide means for placing adequate educational 
facilities within the reach of every citizen. 

We have now completed our brief survey 
of the individual productive agencies ; we have 
seen that, strictly speaking, the only agencies 
are the physical forces which produce motion, 
and the motives which influence man's will, 
leading him to cause certain motions to be 
made rather than others ; yet under the license 
of figurative language we may classify those 
agencies as land, capital, labor, and intelli- 
gence : land, since there is no getting access 
to natural forces except through land owner- 
ship or rental ; capital, since the ownership 
of future goods is essential to the present 
producer ; labor, since human labor supplies 
whatever physical force it is impossible or 
impracticable to secure from land and the 
agencies controlled by its owners ; intelligence, 
the most convenient collective term for the 
human faculties, active in production and de- 
termining its amount and character. 

In actual industry we see these agencies 



THE ORGANIZATION OF INDUSTRY 293 

only in combination. We see also different 
persons combining their efforts as producers. 
It is easier to classify the persons than to 
classify the agencies. A rough classification 
of producers as capitalists and laborers early 
becomes popular and is retained in ordinary 
use. After other qualities than those neces- 
sary for the accumulation of capital and for 
the application of physical strength to mate- 
rials become prominent, this classification be- 
comes inaccurate and misleading. Attempts 
to rectify it by differentiating the landlord 
and then the entrepreneur, or manager of in- 
dustry, from the capitalist class afford only a 
partial remedy, for to an increasing extent 
individual producers unite in themselves the 
control of tv^o or more agencies, and especially 
those who furnish labor are seen to be capa- 
ble of furnishing also the capital, the intelli- 
gence, and such control of natural forces as 
the industry in which they are engaged may 
require. We are compelled finally to abandon 
the attempt to analyze production by classify- 
ing producers as persons, and to resort to a 
study of the efficient agencies without regard 



294 ECONOMICS 

to the arrangements, whether legal or physi- 
cal, which place the control of those agencies 
in one place rather than another. 

The organization of industry begins with 
the earliest forms of industry. As new feat- 
ures develop, they appear within the organiza- 
tion. There is no industry except organized 
industry. But the organization becomes more 
complex as society develops new wants and 
increases its productive power. The most 
prominent features of this more complex or- 
ganization are : first, an extension of the divi- 
sion of labor ; second, an increased localization 
of industry or territorial division of labor ; 
third, a tendency to production on a larger 
scale, and, fourth, the development of special- 
ized machinery and skill. 

Organization is possible without very exten- 
sive division of labor or differentiation. Pro- 
ducers may merely combine their powers to 
accomplish results which would be impossi- 
ble without combination. But when the stage 
is reached in which a person confines himself 
to one occupation, instead of attempting to 
supply his wants largely by his own direct 



THE ORGANIZATION OF INDUSTRY 295 

efforts, new methods of increasing productive 
power become possible. Much practice makes 
possible a high degree of dexterity. The ex- 
perienced proof-reader, for instance, detects 
the smallest error, even the slight imperfec- 
tion in a letter which the ordinary reader would 
overlook. With many repetitions the most 
difficult manual operation becomes easy, and 
if the workman cares to improve his skill, 
becomes more nearly perfect. Invention and 
discovery are encouraged by the subdivision 
of labor, and what is more important the in- 
ventions are more likely to be made by those 
engaged in the industries. In this way the 
possibility of a reward for invention becomes 
an inducement to more painstaking work. The 
division of labor further allows a better utiliza- 
tion of all grades of labor, giving to each so 
far as a proper division extends, as nearly as 
possible, the exact duties for which his strength 
and abilities thus qualify him. 

The localization of industry brings somewhat 
similar advantages. In some cases particular 
communities have developed the industries 
which they have established and fostered to a 



296 ECONOMICS 

higher degree than would have been possible 
elsewhere, and the total wealth product of the 
world is doubtless increased by such territorial 
subdivision. The causes by which the localiza- 
tion has been brought about are partly physical 
and partly the deliberate results of man's choice. 
" The iron industries of England first sought 
those districts in which charcoal was plentiful, 
and afterwards they went to the neighborhood 
of collieries . . . The Sheffield cutlery trade is 
due chiefly to the excellent grit of which its 
grindstones are made."^ The beet sugar in 
Germany, however, and the potteries of Tren- 
ton, NJ., owe their existence to different causes. 
A slight disadvantage in physical conditions is 
more than compensated by the superior man- 
agement and the more intelligent labor of those 
engaged in the industries. 

Combination and subdivision of labor do not 
exhaust the possibilities of organization. Both 

1 Marshall, Principles of Economics, Bk. IV., Chapter X. 
Marshall suggests as other causes the patronage of a court; 
and among the modern influences tending to favor the localized 
industries he mentions the cheapening of the means of commu- 
nication, the establishment of subsidiary industries, etc. 



THE ORGANIZATION OF INDUSTRY 297 

for the individual and for communities there are 
limits to profitable subdivision. The principle 
of diversification of industry is the last to be 
consciously adopted, but it has its own obvious 
advantages, which have been too frequently 
sacrificed from failure to consider all features 
of the industrial situation. 

By the organization of industry is meant not 
merely the separation of producers into trades, 
and into minute portions of trades, but, further, 
the bringing together of the various productive 
agencies in such a way that they become really 
operative and efficient. It is the name applied 
to a series of positive actions. A farmer, by 
years of saving, succeeds in getting control of 
a certain amount of capital, or he borrows from 
some one who has saved it, the capital he needs ; 
he selects a farm suitable to the crop which he 
expects to raise and within reach of his market, 
he employs the necessary laborers, he purchases 
the necessary implements, he chooses the seed 
that is to be planted, he directs how much labor 
shall be put on each field, how many times the 
corn shall be ploughed, what fences shall be 
built, when the crop shall be harvested, where it 



298 ECONOMICS 

shall be offered for sale, in a word, he organizes 
industry. With the extension of the division of 
employments the organization becomes more 
complex, but the division and the organization 
are not identical. The organization may be very 
highly developed in industries which, from their 
nature, do not allow a minute division of labor, 
and the organization may be very weak at cer- 
tain points, though a thorough division of labor 
has been introduced. Those improvements in 
the organization of industry which prevent mis- 
applications of capital or energy materially 
reduce the costs of production. As the organi- 
zation of industry becomes more intricate, it be- 
comes at times more sensitive, and a reduction 
of costs may often be secured by such changes in 
the forms of organization as shall secure more 
perfect insurance against loss. 

The survey of the organization of industry 
should lead to a clear conception of the source 
of the productive power of society. Modifying 
the phraseology of MilP to bring it more nearly 
into conformity with the terms employed in the 
preceding discussion, and reversing the order of 

1 Principles, Bk. I., Chapter VII. 



THE ORGANIZATION OF INDUSTRY 299 

enumeration that the sources may appear in the 
order of their importance, we may conclude that 
the productive power of society will be great 
when there exist : (a) active cooperation of 
society, especially of the State, and consequent 
judicious direction of the social forces; (d) con- 
ditions favorable to a high degree of energy, 
enterprise, and moral trustworthiness; (c) serial 
methods of production — the outward indication 
of which is the presence of relatively large 
quantities of future goods ; (d) possession of 
abundant material resources. 



CHAPTER XIV 

PROPOSITIONS CONCERNING INDUSTRY 

The productiinty of land depends on the variety 
of hitman zvants. We have seen that the in- 
crease of land demands increased knowledge 
concerning its productive possibilities, rather 
than increased area. Every new item of know- 
ledge brought to light by practical cultivators 
or by experiment stations is the equivalent of 
added acres. A change in the methods of cul- 
tivation, which permits two crops in the year 
where there had been but one, is equivalent to 
the doubling of the land area. It does not 
follow that the total product will be doubled. 
This depends upon the remaining limitation, as 
of capital or labor. But the contribution to the 
product from land will be doubled. 

Another condition of the productivity of land 
lies in the variety of wants. Just as the divi- 
sion of labor is limited by the extent of the 
market, so the productivity of land is limited by 
300 



PROPOSITIONS CONCERNING INDUSTRY 30I 

the variety of products desired. The positive 
statement of this truth is that every increase in 
the variety of wants puts some land to a better 
use and so adds to its productivity. Oftentimes 
the increased variety in consumption, which 
thus favorably influences industry, springs not 
from the discovery of some commodity hereto- 
fore unknown, but from the removal of some 
prejudice which has prevented the general use 
of a familiar commodity. Fantastic or fashion- 
able whims have often foolishly retarded the 
full development of agriculture by demanding 
products which can be produced at home only 
with great difficulty ; or by demanding foreign 
products which can be procured only by ruinous 
exploitation of home resources in the produc- 
tion of one or two commodities for which an 
export market has been found. The proposi- 
tion, however, does not refer to a diversity of 
wants within the country merely. The diversi- 
fication may come equally from new foreign 
demands; Whatever enables a community to 
put its land to better use by cultivating crops 
for which its peculiar properties are more 
exactly suited, is of economic advantage. 



302 ECONOMICS 

The soil is a result of gradual accumulation, 
and must be renewed either by natural or by arti- 
ficial means. The soil is to be looked upon as 
a fund of productive qualities capable of exhaus- 
tion. In some favored localities nature contin- 
ually renews the fertility of the soil by carrying 
new elements to replace those withdrawn as 
plant food. Fine silt and organic matter are 
brought on the wind, or by inundating rivers in 
even greater quantities than are used up, so that 
soil increases each year in depth and fertility. 
Fields which can be plentifully supplied with 
manures may be similarly enriched by the 
agency of man while yielding annual crops. In 
general, after lands have been cultivated for a 
longer or shorter period, depending upon the 
degree of their original fertility, it will be neces- 
sary to supply those elements which either were 
originally scarce or have become so by cultiva- 
tion. Western prairie lands have in some in- 
stances yielded a single annual crop for thirty 
years or more in succession, but this soon be- 
comes a wasteful exploiting of nature's accumu- 
lations, and a limit is finally reached when the 
land must be put to other uses or allowed to lie 



PROPOSITIONS CONCERNING INDUSTRY 303 

fallow. An intelligently selected rotation of 
crops, with a timely supply of the particular 
elements of soil that are found to be lacking,^ 
will keep the land in good working order indefi- 
nitely. It thus tends to become more like a 
factory in which materials are supplied and 
handled in strict accordance with the results 
expected, and less a mere game of hazard played 
out by the chances of the distribution of plant 
food. 

Cultivation^ the sJiifting of population, the 
cheapening of transportation, and other social 
changes tend to equalize the prodnctivity of differ- 
ent areas. Primitive society finds greater differ- 
ences in the productivity of the different parts 
of the land at its disposal than a society in 
which there is a well-developed consumption 
and diversified industry of the kind that we 
have come to regard as normal. The decrease 
of rent gradually effected in the course of ordi- 
nary cultivation through the improvement of 
poorer soils is first noticeable. The cheapening 
of transportation and the spread of population 
to new areas has a profound effect in the same 
i See p. 39. 



304 ECONOMICS 

direction. Lands which were Httle valued be- 
cause of their remoteness from centres of popu- 
lation, become of great value as population 
spreads from its centres, or new centres are 
established. The opening of canals and of other 
waterways, the building of railways, and the 
improvement of country roads break down the 
advantages possessed by the lands immediately 
about the markets, and add to the resources of 
the community by rendering all good lands more 
readily available. The chief original distinction 
between good and indifferent lands is based not 
always on any real differences in their capacity 
to yield useful products, but often rather on 
differences in their location, their accessibility, 
and their capacity to produce those few commod- 
ities that are originally most in demand. These 
latter differences are of the kind that disappear 
rapidly when population increases, transporta- 
tion facilities are introduced, and wants are di- 
versified. The general effect of such progress 
is therefore to equalize the productivity of differ- 
ent areas. In other words, the productive power 
of land depends chiefly on the character of its 
population. 



PROPOSITIONS CONCERNING INDUSTRY 305 

A large part of the expenses of agrictdtural 
production are due to the initial obstacles. 
There are certain permanent expenses of pro- 
duction in agriculture as in other branches of 
industry. But in a progressive community 
there are others of a temporary character made 
necessary by the obstacles, some of which were 
referred to in a preceding paragraph. It is for 
this reason that the price of food is relatively 
higher in a new and progressive country. Ex- 
tensive methods of cultivation, using up reck- 
lessly the productive qualities of the soil, may 
for a time conceal the real conditions, but as 
soon as there is any feeling of responsibility 
for the maintenance of the soil on the part of 
those who are already in possession of desirable 
lands, and a determination on the part of others 
to bring new lands into cultivation, or to bring 
them within effective reach of the market, the 
special expenses connected with the overcoming 
of obstacles shows itself. The prices of prod- 
ucts must rise high enough to cover not only 
the ordinary expenses of production, but to re- 
imburse producers for the extraordinary ex- 
penses caused by these obstacles. A strong 



306 ECONOMICS 

argument for collectivist action has been drawn 
from these facts. If society as a whole will re- 
move the initial obstacles, and open new areas 
to cultivation where it can be done by digging, 
irrigating canals, draining marshes, etc., the 
yield of agricultural products may be vastly 
increased without the rise in prices and rents 
made necessary by the ordinary method. If 
the whole matter be left to individual initia- 
tive, the prices of food and other products must 
rise to a point sufficient to cover the expense of 
both ordinary production and initial enterprise, 
and that not merely on the new products, but 
on all others, however cheaply produced, on the 
lands already cultivated. 

TJie greatest retuini from the land of the station 
will not be secured when it is all under cultiva- 
tion. That there may be a conflict of interests 
between society and certain of its members is 
shown nowhere more clearly than in the treat- 
ment of forests. One-fourth of the land of a 
country, in the opinion of an eminent author- 
ity, should be in forests. When a fourth of 
it has been taken under cultivation, therefore, 
any further increase of product should be sought, 



PROPOSITIONS CONCERNING INDUSTRY 307 

not by the cultivation of more land, but by a 
more intensive culture of that which is already 
under plough. Forests are sometimes destroyed 
for the sake of the timber, but loss from the 
cutting down of forests for timber is insignifi- 
cant in total amount when compared with that 
resulting from ruinous forest fires, the result of 
mere carelessness or of the lack of spark extin- 
guishers on railway locomotives. Such fires 
destroy the young shoots and sometimes entirely 
kill out many of the best varieties of trees. 
Scientific forestry yields in the long run a far 
greater supply of timber than a reckless system 
of extermination, and there is the great argument 
in its favor, that it admits a selection for forests 
of those lands that are unsuited to ordinary cul- 
tivation. The sources of streams, and, to some 
extent, their entire courses, including the smaller 
tributaries, should be protected by forests. If 
deprived of their natural protection, they dry up 
quickly in hot weather, and rains have no other 
effect than to cause sudden and severe inun- 
dations rushing immediately to the sea. The 
total quantity of rainfall is diminished. To the 
forest lands gained in this way, the mountains 



308 ECONOMICS 

and hillsides which are too steep or rocky for 
cultivation, and a considerable part of the ordi- 
nary arable land, must be added to secure a 
proper relation of forest to cultivated land. 

Land will not yield its greatest return when 
used for a single crop. Every crop has its own 
particular proportion of various elements of 
plant food, and its own peculiar physical and 
chemical effect upon the land on which it is 
grown. The elements upon which it draws 
most heavily, or of which there is at the outset 
the most scanty supply, will become exhausted 
long before other elements need to be replaced, 
and the particular physical treatment required 
for the crop, such as ploughing, harrowing, or 
drilling, repeated many times without variation, 
becomes injurious. When a field is thus worn 
out, it may be put to a totally different use, 
pasturing, for example, or the elements found 
to be lacking may be artificially restored. The 
land, however, may be kept to its full produc- 
tivity, and its productivity may even be stead- 
ily increased by a suitable rotation of crops re- 
quiring different treatment and drawing at least 
partly upon different elements in the soil. Just 



PROPOSITIONS CONCERNING INDUSTRY 309 

as the human being requires a smaller quan- 
tity of food if there is a variety of food ele- 
ments, so land will yield a greater agricultural 
product if there is a judicious variety of crops. 

Capital is a result of serial methods of produc- 
tion^ is valued because of foretJiought, and is 
preserved by abstinence. The physical basis of 
capital is the serial method in which industry is 
carried on.^ Many persons working together, 
though unconscious of any partnership in their 
labors, find that they can produce more efficiently 
by separating the process of production into 
many parts, some directly, others more remotely, 
connected with the object. Notice, for example, 
how any good is produced. Certain persons 
make tools ; others make the tools by which 
these tools are made ; others cultivate the crops 
necessary to provide food for all who work, 
whether on the land or in the factory ; others 
work at the numerous parts of the long series of 
processes required to clothe the workers ; still 
others, finally, wearing the clothes thus produced, 
living on the food thus provided, using the tools 
furnished by the workers who were themselves 
1 See p. 65. 



3IO ECONOMICS 

provided with tools made by others, and draw- 
ing in countless other ways upon the capital of 
society, are able to put the finishing touches 
on the particular good in question. Capital is 
a result of this method of industry. Value is 
attached to these intermediate goods because 
of the forethought of man in thus taking initial 
steps a longer or shorter time in advance of the 
final act of production. Not because the unfin- 
ished or intermediate good can satisfy a want, 
but because there will be wants in the future 
which can be supplied only by the production of 
these goods now, does it become worth while 
to produce them. As the future wants become 
more vivid, future goods rise in value as com- 
pared with present goods, and the sacrifice 
involved in a proper distribution of labor be- 
tween the production of present and the pro- 
duction of future goods becomes less. At the 
same time the actual advantage which comes to 
society through the possession of capital goods 
becomes greater. Even if the members of 
society should eventually place as high an esti- 
mate on future goods as on present goods, so 
that there would be no room left for interest, 



PROPOSITIONS CONCERNING INDUSTRY 3 1 1 

there would still be a physical advantage in se- 
rial methods of production, and the community 
which followed those methods to the fullest ex- 
tent would have so great an advantage over 
their rivals that there would be little danger of 
their falling back into more primitive methods. 

It is essential in this system of industry that 
capital goods should be produced. It is no less 
essential that those into whose hands these 
goods come should refrain from converting 
them into present goods and thus use up in 
personal enjoyment the wealth which is capa- 
ble of aiding in industry as capital. The man 
who is in possession of a given fund may, if he 
so desire, spend it in gratifying his immediate 
wants. He may purchase a fine residence, build 
a yacht, or squander it in more reckless ways. 
He may, on the other hand, invest the fund in 
some industrial enterprise, putting entirely be- 
yond his reach, so long as he continues the in- 
vestment, the enjoyment which he might have 
obtained as an alternative. If his investment 
is successful, he obtains a share in its product, 
and this he may exchange regularly for such 
present goods as it will purchase. 



312 ECONOMICS 

The giving up of the satisfactions which might 
have been obtained by the expenditure of the 
original fund is called abstinence, and the share 
in the product which is accepted in its stead 
is interest. It is sometimes said that interest is 
obtained as a reward for abstinence, and this is 
true from the individual standpoint, but it is not 
a complete explanation of interest. The part 
which capital actually plays in industry and the 
reason why value is attached to it are a part of 
that explanation. Capital is created by the 
adoption of serial methods of production, it is 
valued because of the importance which society 
learns to attach to future wants, and it is pre- 
served by abstinence. 

The increase of capital does not involve decrease 
of present goods. This proposition may seem to 
be in contradiction with that of the preceding 
paragraph, but it is really a direct consequence 
of it. When we look only at the accumulation 
of capital, we see that it is made by the constant 
sacrifice of present enjoyments. This process 
of abstinence or saving may be carried so far as 
to bring great personal hardship. Every increase 
of capital does involve abstinence from present 



PROPOSITIONS CONCERNING INDUSTRY 313 

enjoyments, and so a decrease in the number of 
present goods. An individual may spend a long 
lifetime in saving, adding the annual increase 
to his original fund, and enjoying present goods 
no further than to supply the bare necessities 
of hfe. But the true effect of capital is seen 
only when we look at the industrial organization 
as a whole. When the serial processes are car- 
ried to completion, they do result in a larger 
product, and the final product is present goods. 
The individual capitalist may add to his fund 
each year, but if so he only increases the final 
product, and if he merely keep his fund intact, 
it is still contributing to the industrial output 
to such an extent that there will ultimately be 
more present goods than if the capital had not 
been saved. This difference between the amount 
of the product before and after an introduction 
of additional capital has no direct relation to in- 
terest or the share of the capitalist. That share 
is governed by the demand for and supply of 
capital ; by the ratio between the need for sav- 
ing and the amount of saving which members 
of society are ready to make ; or, in still other 
words, by the ratio between the estimate of pres- 



314 ECONOMICS 

ent and that of future wants. It is possible to 
knit stockings by hand with only so much capital 
as is represented by a set of knitting needles. 
When the industry is transferred to a factory, 
and an extensive capital is invested, the relative 
part played by capital is enormously increased. 
We might safely conclude that nine-tenths of 
the product is now due to the employment of 
capital in the industry. But the capitalist may 
or may not obtain this share of the product. 
This will depend upon the quantity of free 
capital seeking investment. 

Looking at the entire industrial system, it is 
clear that every increase of capital judiciously 
invested adds to the total product of industry 
and so to the number of present goods. The 
increase of capital is gradual, and therefore the 
increase of present goods is continuous. The 
true conception of the capitalist or man who 
saves is not that of a man who does without 
things, but rather that of the inventive work- 
man who is constantly finding better methods, 
using more efficient tools, accomplishing greater 
results with the same personal cost, so that 
there is a constant surplus fund for the accu- 



PROPOSITIONS CONCERNING INDUSTRY 315 

mulation of capital. The whole of this surplus, 
it is true, might be spent on immediate pleas- 
ures, and in that sense personal abstinence is 
necessary ; but we should make a serious mis- 
take if we supposed that capital is saved as a 
rule by any cutting down of pleasures pre- 
viously enjoyed, and that in any given com- 
munity those who save are, as a rule, compelled 
to deprive themselves of pleasures enjoyed by 
the thriftless. 

AltJiough capital is a permanent ftuid, yet capi- 
tal goods niicst be constantly replaced. One 
a.dditional fact concerning capital requires 
statement. It is partially expressed in the 
third of Mill's fundamental propositions on 
capital, where he says that capital, though saved, 
is consumed. This paradoxical theorem Mill 
regards as one of the most elementary truths of 
political economy. He who saves must spend 
as freely as he who consumes, but he purchases 
future instead of present goods. He builds a 
factory instead of a yacht. He employs labor- 
ers instead of servants. He studies the wants 
of other consumers instead of his own. He 
makes goods instead of consuming them. He 



3l6 ECONOMICS 

does use up materials and so productively con- 
sumes them, but only that an augmented value 
may reappear in the product. Any wealth 
which lies entirely unemployed is for that 
length of time not capital. It is a part of the 
idea of capital that it should be continually 
active. It may appear inactive at intervals, 
because some industrial processes are intermit- 
tent in their nature, and the product may ripen 
but slowly. Except by miscalculation, no cap- 
ital is consumed except productively, and no 
capital is productively consumed except in such 
ways as result in an increase of value. The 
concrete goods are completely destroyed or 
worn out, but new goods of greater value have 
taken their place. The capitalist cannot retain 
his wealth except by turning it over, changing 
its form, substituting new goods for old. As 
the river remains while the water of which it is 
made flows on and is ever replaced, as the body 
continues its existence though its parts are con- 
tinually renewed, as the State remains though 
citizens are born and die and are succeeded by 
others, so the capital fund is permanent though 
capital goods must be constantly replaced. • 



PROPOSITIONS CONCERNING INDUSTRY 317 

The efficiency of indiLstry depends tcpon an 
econofny of skill. The great object of the divi- 
sion of labor is to put each person at the task 
for which he is best fitted. The strongest in- 
dictment which can be brought against the 
existing social order is that it does not invaria- 
bly secure this result. It is possible that the 
same objection can be urged with equal or 
greater force against any other general plan for 
the organization of society. We may expect, 
however, that society will become less and less 
indifferent to the social loss from this source. 
The aggregation of workers in factories where 
differences in capacity may be observed, the 
gathering of merchants in markets where dif- 
ferences in commercial efficiency are exposed, 
and the improvements in transportation which 
make easier comparison of industrial qualities 
and of industrial products — all promote the 
economy of skill. But the chief agency in se- 
curing it is the modern organization of indus- 
trial enterprises on a large scale under the 
control of captains of industry whose resources 
enable them to scour the earth in search of 
persons best fitted for each part of their work. 



3l8 ECONOMICS 

No doubt favoritism, compassion, and chance 
still play a certain part in the selection of men 
for the different grades of work ; but real effi- 
ciency is more and more the determining factor, 
A7t efficient industrial organization demands 
that it be controlled by its most efficient members. 
The truth of this is so obvious that demonstra- 
tion is unnecessary. It is the main reliance of 
those who defend the competitive features of 
the present system. It is probable that the 
competition does secure a very high degree of 
success in the selection of the best organizers 
and managers of industry. But perhaps sufficient 
attention has not been given to the features 
which prevent effective competition. Important 
municipal franchises are sometimes adminis- 
tered, not by those who can make the best use 
of them, but by those who are ready to bargain 
for them on corrupt terms. By inheritance 
capital passes from the hands of those who have 
accumulated and have probably used it wisely, 
into the hands of less worthy descendants or rela- 
tives who squander or misuse it. The surplus 
which springs from the growth of population, the 
development of markets, the progress of societ}^, 



PROPOSITIONS CONCERNING INDUSTRY 319 

passes into the hands of those who have made 
lucky ventures or secured property rights which 
grew up under older conditions and which 
should be modified to meet the social changes. 
In all these ways beneficent competition is 
defeated and the interests of society suffer. 
Whether by the present competitive processes, 
modified by such positive institutions as exist, 
or by a system of more complete laissez-faire, 
or by a system of State socialism in which posi- 
tive regulation by the State would be extended 
to cover the whole field of industry, it should be 
the aim to place and keep in control of the in- 
dustrial mechanism the persons who can manage 
it best. What reward should be given for such 
service is a different question. 

Scientific discoverers and inventors have a 
place in the industrial organization. The work 
of inventors and of the large class of scientific 
experts who bring to light new information 
is to be classed with that of other active mem- 
bers of the industrial organization. Geographi- 
cal explorers, chemists, geologists, biologists, no 
less than machinists, electricians, or physicians, 
are all needed in the performance of the vast 



320 ECONOMICS 

task given to the human race, viz., the conquest 
of nature for the more complete satisfaction of 
all human wants. It is not essential that the 
inventor should be conscious of making any 
direct contribution to the social product. His 
motive may be the mere satisfying of intellect- 
ual curiosity. Many manual laborers feel no 
concern or interest in the completed product, 
and the ordinary motive is often the day's wage. 
A contribution to the product is, nevertheless, 
made by his labor, and there is no discovery of 
science that does not have its social significance. 
The diffusion of knoiuledge increases the pro- 
ductive pozver of society by tending to equalize 
indiistrial opportunities. Among the various 
causes of industrial inefficiency none is so glar- 
ing as inequality in the opportunities offered to 
develop latent powers. There is no real freedom 
of competition between individuals, one of whom 
has been put in possession of important informa- 
tion which is withheld from the other ; or one 
of whom has had opportunities of developing his 
mental and physical powers which have been 
denied the other. The chances of securing the 
best work from all, and of finding the right men 



PROPOSITIONS CONCERNING INDUSTRY 32 1 

for difficult and important places, vary directly 
with the diffusion of knowledge. Teachers and 
those engaged in disseminating knowledge 
through books, newspapers, lectures, or other 
means are indispensable industrial agents. 
Directly and indirectly their contribution to the 
social product is very great. 

Industi'ial cooperation is possible only where 
producers are put on an equal footing by a com- 
plete diffusion of knozvledge. It is generally 
held that the goal of industrial progress is the 
securing of a generous product by the labor of 
those who are able to supply their own capital, 
materials, and directive enterprise. The present 
division of society into classes of those who 
save and those who pay others to do their 
saving for them, into classes of those who own 
land and those who pay rental, into classes 
of employers and employees, is thought to be 
only a stage in the general development of 
industrial qualities in all classes. There must 
always be organization of some sort, and some 
method must be found of vesting authority in 
those most competent to exercise it. But there 
is no reason in the nature of the case why land, 



322 ECONOMICS 

capital, and management of industry should 
not belong ultimately to the laborers. There 
is no insuperable obstacle to the success at 
present of any industry organized on that basis 
except the unequal diffusion of knowledge and 
mental training. Any group of persons now 
has the perfect legal right to establish such 
an industry, and in fact there are some such 
industries in successful operation. Industrial 
cooperation cannot become the rule until pro- 
ducers are put on an equal footing by the 
complete diffusion of knowledge throughout 
society. All persons will not show equal 
capacity, but every genius will have an oppor- 
tunity for healthy development and no one 
will be denied opportunity for full mental 
growth because of unfavorable circumstances. 
We shall learn to exploit to the full our na- 
tional intellectual resources as we now attempt 
to exploit our natural resources. ^ 

1 Professor E. J. James, Address before the American Insti- 
tute of Education, at Bethlehem, N.H., 1891. 



CHAPTER XV 

RESTATEMENT OF FAMILIAR PRINCIPLES 

The division of labor increases the efficiency of 
production. The first great treatise on political 
economy, Adam Smith's Wealth of Nations, 
opens with a discussion of the advantages of 
the division of labor introduced by an illustra- 
tion drawn from the manufacture of pins. He 
shows that in a small pin factory employing 
only ten men, where the subdivision of work 
was therefore not carried to its fullest extent, 
there were turned out daily some 48,000 pins, 
or 4800 for each workman. Mr. David Wells 
brings the illustration down to our own times by 
citing a modern pin factory in which three men 
manufactured daily 7,500,000 pins, or 2,500,000 
for each workman. It would probably be quite 
impossible for a man without the cooperation 
of others to produce even a single pin. Even 
in occupations which have not been so much 
modified by the introduction of machinery, the 
323 



324 ECONOMICS 

same effect follows the subdivision of the 
work into distinct branches, each workman con- 
fining himself to one of these branches. This 
great economy arises chiefly from three sources. 
The laborer acquires manual dexterity by in- 
numerable repetitions of the same operation. 
Every day his work becomes easier, and if 
there is sufficient motive to prevent a corre- 
sponding lessening of exertion, this greater 
dexterity is accompanied by increased product. 
If an occupation is of a kind that does not 
permit laborers to specialize in this way, but 
requires each person who follows it to learn a 
larger number of different kinds of work, it is 
not likely to advance so rapidly as others in 
which the specialization takes place. Farming 
is an occupation of this kind. Men cannot 
confine themselves to sowing, cultivating, har- 
vesting, or threshing, because these come at 
different times in the year. Neither can a 
farmer produce corn or oats or live stock ex- 
clusively, because land requires a rotation of 
crops, and it is more advantageous to combine 
several kinds of agricultural products. 

Allied to this advantage of increased dexterity 



RESTATEMENT OF FAMILIAR PRINCIPLES 325 

is another. Close and long attention to a single 
occupation enables the workman to think of new 
methods to discover improvements in machinery, 
and even to invent new tools and machines. Not 
many of the greater inventions, such as the cot- 
ton-gin, the steam engine, the sewing-machine, 
or the electric motor, have been made in this 
way. They have come rather from the patient 
investigations of a class of specialists whose 
energies were concentrated on working out an 
idea conceived while watching the work of 
others. But thousands of minor inventions 
and discoveries have been made by workmen 
in the manner indicated. This is much more 
likely to be done where men are employed in 
piece-work than if they are paid by the day ; but 
only where there is some assurance that at least 
for a time the workman will be permitted to 
enjoy the fruits of the increased production 
caused by his discovery. A steel manufacturer 
relates to the writer an instance in which the 
output of a plant was doubled in a period of ten 
years without any increase in the capital or in 
the number of laborers, by .the introduction of 
piece-work, and a policy of liberal encourage- 



326 ECONOMICS 

ment to workmen for such improvements as 
they might make. 

The third advantage which deserves emphasis 
is the opportunity given by the division of labor 
to secure a good adjustment between the work 
to be done and the capacity of the worker. 
Those who have special strength or special 
facility in any particular direction may gain 
the greater rewards which come from doing a 
work in which they have little competition. 
Many other occupations are open to persons 
of less skill or strength who would not be able 
to make their living at all where the subdivision 
of labor had not been carried so far. There are 
other important advantages, such as the constant 
employment of tools and machinery, the saving 
of time necessary to pass from one occupation 
to another, the multiplicity of services arising 
from so arranging work that a laborer may serve 
many persons as easily as one, as, for example, 
in the delivery of parcels or letters, and from the 
multiplicity of copies, as in the printing of books 
or of calico. 

It is usually held, by economists that the divi- 
sion of labor is limited by the extent of the mar- 



RESTATEMENT OF FAMILIAR PRINCIPLES 327 

ket, and this is the case wherever the market 
does not permit the further limit imposed by 
the physical conditions of production to be 
reached. In many branches of industry the 
product is so large that all advantageous sub- 
divisions are already made. If the plant is ex- 
tended, it is simply by duplicating processes 
already in use. If the existing organization of 
the pin industry permits men to make 2,500,000 
pins in a day, it is probable that a reduction 
of the demand to one-half the present amount 
would not materially change the method of 
manufacture, at least after a short interval. 
But a point would eventually be reached where a 
lessenins; of the demand would have that effect, 
and would induce the manufacturer to return to 
more primitive methods. 

Freedom of trade is essential to a good indus- 
trial organization. Political economy has been 
for a century and a quarter a weapon in the 
hands of those who have labored for greater 
freedom to the individual and to industrial 
classes to make such exchanges and such con- 
tracts as seemed to them advantageous. It has 
been repeatedly pointed out that restrictive laws, 



328 ECONOMICS 

and laws framed in the interests of particular 
classes, are to be condemned, not solely for 
their injustice, but because they prevent the co- 
operation of productive agents on such terms 
as will insure the largest product. There is no 
doubt that government action is often successful 
in giving higher values to certain commodities 
or services, and in depriving other commodities 
of a part of their natural market value. There 
is no doubt that governmental supervision often 
brings an ultimate social and economic gain. 
But the activity which is demanded in one 
period by the state of society is often continued 
into another and different set of conditions, 
when it becomes pernicious. The history 
of legislation in enlightened countries has 
been largely the repeal of antiquated restric- 
tions and the removal of burdens that have be- 
come unjust and economically disadvantageous. 
The mere repeal of a bad law, or the enactment 
of a good one, is often insufficient. What is 
needed is that there shall be such enlighten- 
ment of public opinion that the freedom decreed 
or permitted by the legislature shall be in fact 
enjoyed. The present conditiq,n of the labor 



RESTATEMENT OF FAMILIAR PRINCIPLES 329 

organization movement in some of the cities of 
America is a case in point. There are nowhere 
laws making such organizations illegal. But 
there are many industrial establishments which 
do not permit their employees to form organiza- 
tions. It might be difficult to secure to work- 
men the freedom in this respect which their 
interests undoubtedly require without intrench- 
ing upon the equal freedom of employers to dis- 
charge such of their employees as are for any 
reason unsatisfactory. It might, however, be 
done in the case of all corporations enjoying 
public franchises, as a condition of the original 
granting of the franchise. The economic prin- 
ciple involved is that the social product is 
largest and of the greatest social utility, other 
things being equal, when none of the necessary 
factors of production labor under undue restraint, 
but when all are free to work in such combina- 
tions as seem most profitable. 

The abolition of special privileges of manu- 
facture, such as were once granted by royal favor 
to companies or individuals, of laws forbidding 
the exportation of certain products and the 
importation of others, and of the usury laws, 



330 ECONOMICS 

sufficiently illustrate the radical improvement 
secured by the fuller recognition of economic 
freedom. General regulations prescribing the 
conditions on which trade and industry may 
be carried on do not necessarily violate the 
principle. " They fix the plane above which 
competition is to take place," ^ and apply alike to 
all. They interfere unjustifiably with industry 
only when they modify the distribution of 
wealth already produced. It is a different thing 
to establish a permanent social barrier at a cer- 
tain place to which industry adjusts itself as 
to a river or mountain in the physical environ- 
ment. The abolition of sweat shops, for exam- 
ple, works no hardship so soon as it applies to 
the entire competitive field. Even saloon keep- 
ers are apt to favor laws requiring saloons to be 
closed on Sundays and at certain hours of the 
night as soon as they are convinced that the 
requirement is to be universal. 

T/ie interests of society are promoted by each 
member seeking his own interest. The principle 
that the individual by seeking his own economic 
interest, by engaging in whatever occupation 

^ H. C. Adams, The Relation of the State to Industry. 



RESTATEMENT OF FAMILIAR PRINCIPLES 33 I 

and pursuing it in whatever way will bring to 
him the greatest reward, is thereby promoting 
the general interests of society, has sometimes 
been transformed into the doctrine that the in- 
terests of the individual and of society are 
always identical. There are many exceptions to 
the rule that the interests of society and those 
of individuals coincide ; but the general principle, 
that the individual in promoting his own eco- 
nomic interest does thereby serve the interests 
of society, underlies our whole social organiza- 
tion. Acceptance of this principle does not ex- 
clude the consideration of other forces besides 
self-interest for the promotion of the interests 
of society. Reliance may be in part upon self- 
interest, and in part upon civic, religious, or 
social motives. Any of these may come into 
conflict even with enlightened self-interest, and 
it may then be a question whether the act which 
is prompted by motives of self-interest will 
bring a benefit to society greater or less than 
that prompted by a different motive. All that 
can rightly be claimed for the economic mo- 
tive of self-interest is that it does on the whole 
work advantageously to society, and that there 



332 ECONOMICS 

is general harmony of individual interests with 
those of society. 

The benefits of improved production tend to 
diffuse themselves throughout society. No im- 
provement, discovery, invention, or increase of 
wealth materials is of advantage to its owner 
alone, however little he may care for the inter- 
ests of others. An increase of capital benefits 
first the capitalist in whose hands it is accumu- 
lated, but by the very fact of its employment in 
industry other factors are made more produc- 
tive, and so share in the benefit. An important 
invention, even when patented, is of social ad- 
vantage. It diminishes the cost of production, 
or utilizes new materials, or permits the employ- 
ment of new energy, or otherwise reveals hidden 
sources of wealth. The patent cannot possibly 
secure all of the advantage to the inventor, and 
it generally secures but a very small part. Books 
and newspapers and schools and travel increase 
the rapidity of circulation of such advances in 
production, but without these aids the operation 
of economic law would insure a similar result. 
When a laborer rises from the ranks to become 
an employer of labor, he promotes the interests 



RESTATEMENT OF FAMILIAR PRINCIPLES 333 

of his fellow-laborers if he is efficient and suc- 
cessful.^ When laborers add to their product 
by more energetic and intelligent effort, they 
not merely increase their own wages (provided 
they are free to seek their own interest), but 
they also confer a benefit upon consumers — 
among whom other laborers form the chief part 
— and permit a more advantageous investment 
of the capital engaged in the industry. It is 
through changes in consumption that the greater 
part of the process of the diffusion of benefits 
takes place.2 

The vahie of commodities coincides with the 
expenses of their production. The classical doc- 
trine that cost of production regulates the value 
of freely produced commodities has been re- 
placed in our discussion of value by the newer 
explanation which traces value to marginal utility. 
Cost has been used only in its more accurate 
sense of actual expenditure of energy or loss 
of vitality occasioned by active participation in 
industry. In this sense it is evident that there 
is no constant relation between cost and value, 

1 See general law of distribution in Ch. XVII., especially p. 395. 

2 See Chapter VI., " Propositions concerning Consumption." 



334 ECONOMICS 

and it is also clear that values can be measured 
far more easily than costs, and that they can be 
more easily compared with each other. In 
order to ascertain the cost of a commodity, it 
would be necessary to make actual inquiry of all 
persons, capitalists, or laborers who have con- 
tributed to it directly or indirectly ; to ascertain 
whether they have made their contribution at 
any personal cost to themselves, deducting any 
other benefits that resulted from the same ac- 
tivity. 

When writers have attempted to establish an 
equivalence between cost and value, they have 
not taken the trouble to ascertain actual cost, 
and so they have not really used it at all in the 
comparison. They have ascertained only the 
value, and from this have attempted to deduce 
the cost. What is possible, however, is to com- 
pare the value with the expenses of production 
to an individual employer. From his own stand- 
point the employer looks upon all the contri- 
butions of his fellow-producers as so many 
commodities or services to be secured on as 
favorable terms as possible, and the sum of his 
investments in the particular commodity must 



RESTATEMENT OF FAMILIAR PRINCIPLES 335 

Stand in some definite relation to the value of 
the commodity at the time when he places it 
upon the market. Self-interest would prevent 
any producer from continuing indefinitely to 
produce commodities at a greater expense 
than is warranted by their value. If, on the 
other hand, the value is greatly in excess of the 
combined expenses of production, so that there 
are unusual profits to be made in the manufact- 
ure, an increased competition of others will be 
attracted, resulting in so great a production that 
marginal utility will be reduced by the increased 
supply. If it is practicable to secure concerted 
action among the entire body of producers of a 
single commodity, so that competition is abol- 
ished, the value may be kept considerably above 
the expense of production. This is most easily 
accomplished in the case of commodities, like 
coal or oil, where the supply is regulated not so 
much by the will of the original producers as 
by those who control transportation facilities. 
But it is sometimes accomplished even with 
commodities which would ordinarily be classed 
among those "freely produced." There is al- 
ways present a potential competition, but the 



336 ECONOMICS 

initial obstacles in the way of making it effective 
allow a wide margin for the rise of values above 
expenses. A railroad which taps an extensive 
coal-field may long retain control because of the 
expense of building a new road and the difficulty 
of securing a charter and right of way. Profits 
may be much higher than in other industries 
without being sufficiently great to justify the 
building of a competitive road. 

Many other exceptions and reservations would 
be necessary to the validity of the law that value 
coincides with expense of production, if in the 
latter term we included all the original invest- 
ments. But in real life any unusual gains are 
rapidly capitalized, and any new investor finds 
them added to his expenses as well as to the 
value of his product. The railway shares, for 
example, increase in value to correspond with 
the earning power, and the equivalence of expense 
and value is thus secured by increasing the 
expenses rather than by reducing value. The 
general rule for freely produced commodities is 
that value tends to equal the sum of expendi- 
tures necessary to bring a product fi.nally upon 
the market, including in the estimate of expenses 



RESTATEMENT OF FAMILIAR PRINCIPLES 337 

an allowance for ordinary profit to the final em- 
ployer or dealer. 

There can be but one price for a given commod- 
ity in a given market. By the market, is meant 
the area within which there is free competition 
of buyers and sellers, and within which the con- 
ditions are such that both buyers and sellers 
may readily compare prices. Wholesale and 
retail prices are not equal because the wholesale 
market is distinct from the retail market, even in 
the same cities and towns. Retail buyers are 
as much cut off from the wholesale sellers as if 
they were in a different country, and the only 
ordinary comparison of prices is among retail 
dealers who add to the wholesale price, repre- 
senting the entire expense of the product up to 
that point, an allowance for the expenses of retail- 
ing, including the labor of subdividing parcels, 
exposing for sale, carrying the stock until sold, 
insurance, and profit. This calculation is made 
as a means of estimating the success of the retail 
store, rather than as a means of deciding what 
the retail price shall be. The successful mer- 
chant does not fix his prices by adding a fixed 
and uniform percentage to the cost of his goods. 



338 ECONOMICS 

He does not hesitate at times to allow their 
price to fall below cost, if it is clear that their 
marginal utility has fallen since his stock was 
purchased ; and, on the other hand, he takes ad- 
vantage of favorable conditions to sell far above 
the cost to himself ; or, stating this in the 
reverse manner, he buys freely when there is an 
opportunity to secure a stock at very much less 
than the goods can be sold for at retail. 

No one understands better than the retail 
dealer that values, or retail prices, are to be 
governed by marginal utility — by the relation 
between the present public desire and the supply 
offered. He will make a very small profit or 
none at all on certain classes of goods and a 
very high profit on others. In each case it is 
the state of the public mind that is the deciding 
factor. The natural price is as definitely fixed 
as the cost, though an individual dealer may for 
a time offer his goods above or below it. Local 
variations may occur for special reasons, such as 
the popularity of particular locations, but there 
is a general tendency toward an equality of 
price throughout the market, whatever the com- 
modity and whatever its cost. 



RESTATEMENT OF FAMILIAR PRINCIPLES 339 

Inditstry is limited by capital. This is the 
first of Mill's four famous propositions. Indus- 
try cannot be carried on until the materials of 
industry and the means of support for those who 
are to engage in it have been provided. We 
live, not upon the proceeds of our present indus- 
trial activity, but upon that of the past. Tools 
are made, buildings erected, roadways con- 
structed, and food and clothing produced, all in 
response to immediate demands for those com- 
modities; but buildings and roads are made 
of such permanent materials that they can be 
utilized in future production, tools are made to 
use again and again, food and clothing are pro- 
vided in sufficient quantity to support and clothe 
producers in every branch of industry. Indus- 
try cannot be carried on unless there is capital 
to be devoted to these preliminary steps. The 
amount of industry is fixed by the quantity of 
capital available and actually used, not merely 
by the quantity available ; for though industry 
is limited by capital, it does not always reach the 
full limit. Capital may be temporarily unem- 
ployed, and very often it is not employed in the 
most remunerative manner. 



340 ECONOMICS 

The chief bearing of this proposition is in 
the development of another — that a demand 
for commodities does not constitnte a dema^id 
for labor. A demand for particular commodi- 
ties may cause industry to be diverted from an 
old channel to the new. It may displace certain 
laborers by others. But it does not create a 
demand for additional labor unless it provides 
the necessary capital upon which the new labor 
depends for materials and support. Since indus- 
try is limited by capital, it cannot expand to meet 
the new demand unless additional capital is fur- 
nished or the amount needed withdrawn from 
other enterprises. 

Fixed and circulating capital must stand in a 
definite relation to each other. Capital is a col- 
lective term for all those products of industry 
which are used in further production. Some of 
them, like seed, materials, and merchants' stocks 
of goods, are used only once, after which they 
must be replaced by others if the production is 
to continue. Others, like tools and buildings, 
are used many times, or continuously for long 
periods before they need to be replaced. The 
first class constitute the circulating capital, the 



RESTATEMENT OF FAMILIAR PRINCIPLES 34 1 

second the fixed capital. The proportion be- 
tween the two classes is governed by a multitude 
of conditions. The amount to be paid out in 
wages, for example, varies greatly in different 
branches of industry, because of the longer or 
shorter time which must elapse between the 
initial steps of production and the final sale 
which reimburses the capitalist for his invest- 
ment. It sometimes happens that by making 
extensive permanent improvements it becomes 
possible to turn out an equal product with much 
less circulating capital. Less capital is needed 
for current production because the permanent 
features of the industry are improved. The 
increase of fixed capital at the expense of circu- 
lating capital may bring serious disturbance. 
The gradual increase of both is assured with 
the progress of society through the introduc- 
tion of serial methods of production. To pre- 
serve a judicious balance between them is 
essential to prosperity. 

Profits tend to a niinimtim. It has long been 
held that profits, including in that term the en- 
tire remuneration of employers and capitalists, 
constantly tend to diminish because of the in- 



342 ECONOMICS 

crease of capital faster than the opportunities 
for its remunerative employment. It is obvious 
that neither a fall nor a rise in the rate of prof- 
its, if we include two such diverse elements as 
interest on capital and the returns obtained by 
employers for their participation in industry, 
can be continuous. The ability to discover 
new and profitable fields for investment will 
show itself only the more promptly if a low rate 
of interest renders it comparatively easy for one 
who has organizing ability, but no capital at his 
disposal, to secure the amount needed. Profits 
in the narrower sense are therefore very apt for 
a time, at least, to show a tendency directly the 
reverse of interest. There is abundance of his- 
torical evidence that there has been a consid- 
erable fall in the rate of interest, limiting the 
term to the return for capital. The tendency 
is checked by the opening of new fields of invest- 
ment, for these are of benefit, not merely to the 
organizer of industry who discovers them, but 
also to the capitalist whose capital thus finds 
new employment, the landowner whose mate- 
rials are called into requisition, and the laborers 
whose cooperation will be necessary to any utili- 



RESTATEMENT OF FAMILIAR PRINCIPLES 343 

zation of the new fields. But the increase in the 
number of the men who can find or make such 
opportunities, especially if they are of a similar 
type, tends to reduce their own rewards by their 
competition with each other. Eventually profits 
as well as interest will tend to a minimum, though 
not with the same uniformity. 

Wages vary with the expense of subsistence. 
The relation between wages and the standard 
of living has been explained in another chapter. 
Whatever margin we recognize between the 
laborer's income and the bare cost of subsist- 
ence, it is clear that there is such relation 
between them that total wages must be in- 
creased to meet any general and permanent 
increase in the expenses of the necessaries of 
life, and that any decrease in those expenses 
will permit a decrease of wages without either 
diminishing population or setting in motion the 
forces which produce a change in the standard 
of living. Employers of labor have therefore 
correctly regarded a cheapening of food and 
clothing as desirable from their own standpoint. 
Wages are to them merely one of the expenses 
of production, and anything which reduces 



344 ECONOMICS 

house rent and the expenses of living in any 
other respect permits a corresponding reduction 
of wages. Not every such lowering of the ex- 
penses of living is followed by a lowering of wages. 
Put any conditions which enable laborers to 
maintain high wages, under such circumstances, 
would have enabled them to secure an increase 
if the expenses of subsistence had not decreased. 
It is simply evidence that there was a favorable 
trend in their direction which they had not 
realized. And, indeed, the greater part of the 
very great increase of wages during the past 
hundred years has been brought about in pre- 
cisely this manner. It is much easier to keep 
nominal wages at a given point, when that has 
come to mean higher real wages, than to in- 
crease at the same time real and nominal wages. 
A chief factor is a united and vigorous senti- 
ment in favor of a definite demand, and this is 
more easily created in behalf of wages which 
have already been nominally enjoyed. Fort- 
unately the cheapening of commodities has 
continually expanded the purchasing power of 
both money and labor. 

Population tends to increase faster than the 



RESTATEMENT OF FAMILIAR PRINCIPLES 345 

means of subsistence. The doctrine of popula- 
tion, ably propounded and defended by the 
English economist Malthus, has been the sub- 
ject of much controversy. Its statement has 
usually been coupled with specific remedies for 
the calamities which the unchecked tendency 
of population to outrun subsistence would 
bring. Both these remedies and the doctrine 
itself have been savagely attacked, but it cannot 
be said that the doctrine has been overthrown. 
Where there is a full sense of responsibility for 
the welfare of children on the part of parents 
and of the community, so that marriages do not 
take place earlier than is warranted, and the 
desire to provide for the welfare of offspring- 
furnishes a constant spur to effective industry, 
there exists what Malthus calls the preventive 
check to overpopulation. Where there is no 
such feeling of responsibility, nature steps in 
to prevent a too rapid increase by such positive 
checks as pestilence and famine. Communities 
are given their choice of positive or preventive 
checks. The preventive checks are not always 
or usually exercised consciously. Through the 
development of the family and of capital, social 



346 ECONOMICS 

instincts are created which hold in check the 
tendency in population to increase faster than 
the means of subsistence and so to press hard 
upon the food supply. 

The application of labor and capital to land 
is subject to tJie law of diminisJiing returns. A 
certain amount of work can be expended upon 
a given piece of land with a maximum return 
per unit of labor or capital. If additional work 
is done the result will be to increase the 
product somewhat, but not in the same pro- 
portion to the increased expenditure of en- 
ergy. If, for example, $1000 a year is spent 
on a farm with a result that 5000 bushels 
of corn are produced, it may be that ^1200 on 
the same farm would produce 6000 bushels, in 
which case the additional ^200 has brought as 
good a return as the original $1000. In some 
instances, where the land has not been culti- 
vated to its full capacity, it might even bring a 
larger proportional return. But it is obvious that 
a point would be reached after which this would 
no longer be true: ^1400 spent on the farm 
would probably yield more than ^1200, but not 
one sixth more, or 7000 bushels, as it should if 



RESTATEMENT OF FAMILIAR PRINCIPLES 347 

the ratio were to be continued. The return 
may be put at 6500. This ratio would rapidly 
diminish as additional amounts of work are 
applied. Each addition would add something, 
but not so much as previous applications had 
done. It is this fact of diminishing returns in 
agriculture that has given color to all the specu- 
lations of the English school of political econ- 
omy. It has been regarded as the corner-stone 
of the science. Upon it have been built the 
law of population, of wages, of profits, of rent, 
and of social progress. The niggardliness of 
nature has been held responsible for the Hmita- 
tions experienced in the increase of prosperity 
and general happiness. Whether the law is 
really of this character we shall inquire more 
minutely in the chapter on the "Obstacles to 
Social Progress." 

Rent arises from differences in the fertility of 
soils. When soils of different grades of fertility 
are cultivated for the same market, the value of 
the crops must be such that those who cultivate 
the poorest soils are as well rewarded for their 
labor as producers of equal abilities in other 
branches of industry, or, putting it in another 



348 ECONOMICS 

way, capital expended in the cultivation of the 
inferior soils must be as well remunerated as 
capital in general ; otherwise the inferior soils 
will be thrown out of cultivation and the dimin- 
ished supply will again bring prices up to the 
point where they can be cultivated with the 
ordinary profit. If, however, prices are high 
enough to enable crops to be produced at a 
profit on the poorest soils in cultivation, every 
piece of land which is more fertile or better 
situated will yield a surplus revenue measured 
in amount by the extent of its superiority over 
the poorest or marginal land. This surplus is 
economic rent. Land cannot be said to yield a 
rent unless after paying wages and interest and 
profits there is a clear surplus to which neither 
the farmer nor his laborers nor the capitalist 
from whom he may have borrowed his capital 
can establish a claim. 

This surplus exists whenever there are differ- 
ences in fertility, unless the poorer soils are 
cultivated at an actual loss. This may no 
doubt be done temporarily and even for many 
years, if there are personal reasons for keeping 
up an estate or sinking each year capital with- 



RESTATEMENT OF FAMILIAR PRINCIPLES 349 

drawn from other sources. Such a policy is 
unsound except in so far as such motives in- 
duce keener activity and so lead to the creation 
of new capital. Ordinary economic motives 
would prompt the withdrawal of capital from 
the unprofitable cultivation. This would usually 
involve merely a change of products, and prob- 
ably such change would affect only the less 
productive portions of the farms or estates in 
question. Careful examination would show that 
there are even in small farms some fields the 
cultivation of which pays more liberally than 
that of others. The margin of cultivation is 
kept lower because of the natural reluctance to 
radical change in location, in crops, or in 
methods of cultivation. The conception of rent 
has been extended to cover differences in pro- 
ductive capacity, whether arising from fertility 
or from peculiarly favorable location. Rent is 
paid on lands other than agricultural, in accord- 
ance with the same general principle. A mini- 
mum rent is fixed by the relative fertility of the 
soil for agricultural purposes, but the rent may 
rise indefinitely from this point in accordance 
with the desirability of location. 



350 ECONOMICS 

The payment of rent does not increase the ex- 
penses of prodiictioit. This follows from the 
manner in which rent is determined. The ex- 
penses of production are greatest on the land 
which pays no rent. The value of the commodi- 
ties are not greater on account of this greater 
expense, since there is but one price for com- 
modities in a given market. Rent is paid on the 
superior soils, because the value is great enough 
to leave a surplus, after meeting the ordinary 
expenses of production. The value is not high 
because rent is paid, but rent is paid because 
the value is high enough to warrant it. Rent 
is, then, an effect, not a cause, of the high value. 
If the value were to fall, the result would be to 
diminish rents, but it would be done indirectly. 
The fall in value would render unprofitable the 
cultivation of the marginal lands, and this cul- 
tivation would cease. The margin vv^ould then 
be at a higher point, since the rent of a given 
piece of land is determined by the difference be- 
tween its yield, and the yield of the land at the 
margin of cultivation, and since the subtrahend 
is now larger than before, while the minuend 
remains the same, it follows that the remainder. 



RESTATEMENT OF FAMILIAR PRINCIPLES 35 I 

constituting rent, will be smaller. This result 
can be permanent only when the total demand 
has actually diminished. With an increasing, 
or even with a stable population, the demand 
constantly augments, and rent will not fall in 
the manner just described, except on lands suited 
only for the production of some particular crop 
which has been displaced by others of greater 
utility. 

There is, however, another manner in which 
rents may be made to fall, viz., by the improve- 
ment of the poorer lands. A rise in the margin 
which results from the fact that poorer lands 
have been improved more rapidly than the 
better ones, is accompanied, not by a lessening, 
but by an increase, of the total supply. But the 
effect is to diminish rents since it lessens the 
differences in soils, and it is upon the differences 
that rent depends. Farmers spend more on the 
improvement of the less productive portions of 
their farms, and public internal improvements 
are directed toward the bringing into cultivation 
of soil not now available. The general effect 
is a diminution of agricultural rents. In the 
cities the improvement of transportation facili- 



352 ECONOMICS 

ties, the clearing out of the slums, the tendency 
of population into the suburbs, have a similar 
influence upon land rents. The receipt of rent, 
then, is due to the possession of superior soils 
at a time when the cultivation of inferior 
soils is essential to the supply. The degree 
of superiority over the poorest land in use is 
the measure of rent. It is a surplus revenue 
and does not add to the expenses of produc- 
tion. 

The profits of employers add nothing to the ex- 
pense of production. Profits, in the more accu- 
rate use of that term, which excludes interest, 
insurance, and the like, is a surplus revenue like 
rent, and is determined in a similar manner. 
The credit for first working out the analogy 
between profits and rent belongs to Francis A. 
Walker. A manager of superior ability takes 
charge of an industry in which there has been 
no profit, and by his better management creates 
one. He discovers economies, secures materials 
at less expense, introduces better methods, 
finds a better market, and in general adds a net 
surplus to the product of the industry. As 
there are soils of different grades of fertility, so 



RESTATEMENT OF FAMILIAR PRINCIPLES 353 

there are employers of different grades of ability. 
Those at the lower margin carry on their indus- 
tries with at least as great expense in the way 
of wages, interest, materials, etc., as fall to the 
share of the superior managers, and their lack 
of skill keeps the output relatively small. 

Here, as in the case of land, a fall in profits 
may be brought about in either of two ways, 
one socially disadvantageous, the other with an 
opposite effect. If the general condition of in- 
dustry is unfavorable, so that fewer goods are 
demanded, many employers will fail and suspend 
their business. The margin of employment 
will then rise. Many laborers will be thrown 
out of employment. Capital will lie idle. The 
more able and skilful employers will continue 
their productive enterprises, but since the dif- 
ferences between employers are now less, prof- 
its which depend upon those differences will be 
smaller. If, on the other hand, the differences 
are diminished by a change in the character of 
the poorer grades, the social result will be 
favorable. The ignorant and shortsighted busi- 
ness man is replaced by one of keen insight and 
executive ability. The new competition causes 



354 ECONOMICS 

a decline of profit, but the community in general 
is better off. 

The test of productiveness is the net prodjice or 
surplus. Both rent and profits have been looked 
upon as a part of the net produce or surplus of 
industry. A reduction of rent and of profits 
has been represented to be of social advantage 
if caused by a rise of the margin of production 
through the process of improving the quality of 
the land at the margin, or the men whose con- 
trol of industry is marginal. The essential 
element in such a decrease of rent or profits is 
that it does not in any respect decrease the 
surplus, but merely transfers it from a partic- 
ular class of producers to consumers, or to 
other producers. 

Speaking generally, all of rent and of pure 
profit, all that part of interest which is not a 
return for present saving, and a considerable 
part of laborers' income, belongs to the net prod- 
uce or social surplus. Those who engage in 
production at a real cost ^ must receive from the 
total industrial product, as a minimum share, 
whatever amount is necessary to replace their 

1 See p. 155. 



RESTATEMENT OF FAMILIAR PRINCIPLES 355 

costs. This is the absolute condition of a con- 
tinuance of industrial activity. Whatever re- 
mains is the surplus created, not by the personal 
activity of the individual, but by the coopera- 
tion of all industrial classes aided by the forces 
of labor and by the accumulations of past in- 
dustry. The real test of industry is the amount 
of this surplus. The physiocrats, who were the 
most prominent economists before Adam Smith, 
thought that a net produce was to be found 
only in agriculture. Adam Smith discovered it 
in manufactures also and traced it chiefly to the 
division of labor. Modern economics still further 
expands the idea to make it include whatever 
portions of the product of industry and com- 
merce are not to be set aside for the reimburse- 
ment of costs. 



CHAPTER XVI 

OBSTACLES TO SOCIAL PROGRESS 

By social progress is meant the gradual in- 
crease and diffusion of wealth, accompanied by 
the unfolding of human capacity to enjoy it. 
General prosperity may be promoted by a wiser 
choice of commodities, by a decrease in their 
real cost, or by a more intelligent use of them. 
Every advance in any one of these three direc- 
tions is a step in social progress. Anything 
which blocks advancement in any of these direc- 
tions is an obstacle to social progress. There 
are innumerable obstacles, some temporary, 
others lasting ; some in physical nature, others 
in man himself ; some baffling the best efforts 
of the entire race, others acting only as an in- 
strument in the separation of the efficient from 
the weak, enabling the stronger to crush out 
the more quickly their unsuccessful competitors. 

One of the obstacles that has received most 
attention because of its relation- to other parts 
356 



OBSTACLES TO SOCIAL PROGRESS 357 

of political economy is the law of diminishing 
returns. The niggardliness of nature has been 
held to be the chief limitation to industrial prog- 
gress. A brief statement and illustration of the 
law has already been given. ^ It is undoubtedly 
true that there are limits to profitable agricultural 
investment on a given piece of land. A piece 
of ground which is well adapted to agriculture 
may not be well adapted by location for building 
or for any other purpose than farming. When 
the owner has expended upon it a sufficient 
amount to secure its full normal yield, any 
additional expenditure will make a very slight 
addition to the yield, or perhaps none at all. If 
it were possible for him to go on increasing his 
investment indefinitely with constant returns, 
no farmer would ever need to own more than 
five or ten acres, since he could secure whatever 
additional crop he desired by simply putting 
more men at work, and sowing additional seed 
in his small farm. Practical experience would 
show that when the point has been reached 
which gives the crop that is planted a fair 
chance of success, it will not be very much 

1 See p. 346. 



358 ECONOMICS 

increased by additional work, and if any more 
men are to be employed profitably it must be on 
new land. Is this fact then to be regarded as 
one of the physical obstacles to progress ? Not 
unless the general reason for our inability to 
secure a larger crop from a given area lies in 
physical nature, where, in fact, as a rule, it is 
not to be found. 

With any given method of cultivation, and with 
a given crop, and with only traditional measures 
of precaution against damage from frost and 
other dangers, the farm will on an average pro- 
duce just so much grain and no more. But if 
the cultivators discover new methods of cultiva- 
tion, better fertilizers, and a more productive 
seed, and especially if changes in the habits 
and wants of consumers enable new crops to 
be substituted, the total yield may be increased 
indefinitely. Taking into account larger areas, 
improvements in transportation similarly in- 
crease the agricultural product by bringing 
new lands into cultivation, thus relieving the 
older lands from the necessity of producing 
crops for which they were unsuited, and ena- 
bling their cultivators to use them more profit- 



OBSTACLES TO SOCIAL PROGRESS 359 

ably. A rough test of the whole process is to 
be found in the price of food. If land is subject 
to a law of diminishing returns, and cultivators 
are being forced to ever poorer lands in order 
to meet the demands of increasing population, 
there will be seen a general tendency of food to 
increase in price. The poorer lands cannot be 
cultivated unless the price of food is high enough 
to meet the increased expense, and this price 
will of course become general. If, on the con- 
trary, the price of food is decreasing, this may 
be taken as evidence that the law of diminishing 
returns is not in operation, or that it is counter- 
acted by other and stronger tendencies. And 
such is indeed the case. Agricultural products 
in general have fallen rather than risen in price 
in the last generation and in the last fifty 
years. 

There is a law of diminishing returns, but the 
actual limitations experienced in agriculture, as 
in other industries, lie rather in social than in 
physical causes. Under given social conditions 
we can obtain only so much by our efforts, but 
the social conditions may be changed and are 
constantly changing, and there is no reason why 



36o ECONOMICS 

in the future they may not more than counter- 
balance any restraint imposed by physical nature. 
As a writer has said, not the niggardUness of 
nature, but the stupidity of man, causes diminish- 
ing returns in agriculture and elsewhere. When- 
ever additional capital and labor are applied at a 
given point because a new use has been found 
for them, they will often bring increased instead 
of diminished returns. Thus there are limits 
which seem to lie in physical nature, but which 
are nevertheless set aside by social changes. 

Other obstacles will be recognized as dis- 
tinctly social and economic, rather than physi- 
cal. The accumulation of capital is essential 
to social progress, but one of the chief ob- 
stacles to such accumulation in early stages 
of society is lack of security. There is no 
sufficient motive to accumulate if the hoard 
is to be seized by any stronger rival or enemy. 
Better enjoy, while others are doing so, the 
result of the chase or of war, than, by saving 
the share assigned to you, become the prey 
of those who are able to rob you. The tribal 
system introduces some elements of security. 
The ownership of property being vested in 



OBSTACLES TO SOCIAL PROGRESS 36 1 

the entire tribe, it becomes the duty of all 
to fight, if necessary, for its protection. 

The recognition of private property intro- 
duces, it may be, temporary confusion by 
again throwing at first the defence of private 
rights upon the individual ; but with an im- 
provement of social order and a full recogni- 
tion of the importance of police functions of 
the state, there comes a stronger guarantee 
of security than before private property is 
estabUshed. What is even more important, 
there is developed a general respect for the 
sacredness of property. There is not only 
less power, but there is also less disposition, 
to interfere with the property rights of others. 
Even those who have but little property real- 
ize that they are better off when that little 
is safe than when it is liable to capture or 
wanton destruction. This obstacle to social 
progress from a lack of security is one that 
must be overcome even more completely than 
at present ; and the most practicable method 
is a better education in the advantages derived 
from social security and a pointing out of 
the petty causes that threaten it, rather than 



362 ECONOMICS 

an increase of police vigilance or government 
interference, except in the extreme cases 
where these may be necessary. Society gains 
more from the growth of sound social instincts 
than from external pressure. 

Still another obstacle to social progress is 
to be removed only by slow educational pro- 
cess. The lack of saving instincts has had 
even more to do with the comparative failure 
of communities which have no capital than a 
lack of security. Improvidence, lack of fore- 
sight, inability to anticipate future wants, a 
vague feeling that some lucky chance will 
carry one through future difficulties, — these 
characteristics survive too frequently even in 
the most advanced communities. Observa- 
tion will convince that the ones who succeed 
are they who do most keenly appreciate the 
future, who take far in advance the initial 
steps in securing the objects which they most 
desire, who accumulate capital with infinite 
care, but who do not hesitate to invest it 
boldly at the right moment. For it must 
not be forgotten that saving instincts demand 
expenditure no less than accumulation. The 



OBSTACLES TO SOCIAL PROGRESS 363 

capitalist is not he who hoards wealth, but he 
who saves and uses capital. The use begins 
as early and is as indispensable as the saving. 
This obstacle to social progress in the lack of 
saving instincts has been overcome in the 
past by the ruthless defeat in life's struggle 
of those who are without them, and a slow 
but sure conquest of such persons by those 
who do their work in serial methods with an 
eye to the needs of the future. There is no 
other way in which it can be overcome in 
the future except as saving instincts may 
be implanted and developed in all classes by 
educational means. 

Until recent times the greatest of all the ob- 
stacles to social progress has been the lack of 
directive intelligence, of industrial enterprise, of 
skill in management of the kind shown by men 
whom we are accustomed to designate as cap- 
tains of industry. It was not a lack of intelli- 
gence, for this has been displayed as profusely 
in earlier ages, but mental activity was directed 
into other channels than the supply of common 
wants and the increase of the agencies that tend 
to harmonize and elevate those wants. War, 



364 ECONOMICS 

religion, and art, and passion have claimed the 
highest energies of man. All of these are social 
and all have contributed to social progress, but 
due attention to the industrial organization of 
society is likewise essential. An effective ad- 
ministration of the machinery by which the or- 
dinary wants of men are supplied has been 
secured only in our own time, and is even now 
far from satisfactory in many departments of 
industry. But many of the ablest men of every 
land are now engaged upon it. The most in- 
ventive and constructive minds are directly em- 
ployed in improving the ways in which goods 
are made. Others equally able are inquiring 
into the best ways of using them. The obsta- 
cle from this quarter has therefore already be- 
come less serious, and we may expect that even 
greater abilities will be concentrated upon these 
problems. 

Man is a progressive being and shows wonder- 
ful capacity for conquering obstacles that seem 
insurmountable. One after another they are 
overcome by the more venturesome and the 
stronger. Less and less they tend to assume a 
definite and permanent form. Land, capital, 



OBSTACLES TO SOCIAL PROGRESS 365 

and directing skill become in turn limiting fac- 
tors. A lack of any one is a serious obstacle, 
but it cannot be said abstractly that the lack of 
any one is more serious than that of another. 
Which one is in fact lacking at a given time is 
only to be ascertained by direct observation, or 
by the terms which those who have it to offer 
are able to make. It is probable that at present 
in civilized countries labor is more scarce than 
any one of the other necessary elements. For it 
is possible that efficient labor may also be lack- 
ing and that this deficiency may prove an obsta- 
cle. It is less to be regretted than any other, 
however, for where it exists it implies a high 
reward to labor. This is itself a favorable con- 
dition for social progress where labor is free. 
A relatively large income for laborers tends to 
secure that diffusion of the benefits of industrial 
progress which is an indispensable condition of 
social progress. It was pointed out in the clos- 
ing proposition concerning industry, that a dif- 
fusion of knowledge is desirable for industrial 
reasons. Inversely, a wider diffusion of wealth 
is desirable for its social, educational, and moral 
results. As nearly as it is safe to formulate a 



366 ECONOMICS 

social ideal, we may find it in a state of society 
in which the only serious obstacle to further 
progress lies in the lack of a sufficient number 
of persons to fully utilize the capital, land, and 
directive energy in existence. 

We may now venture upon a more specific 
enumeration of a few of the positive obstacles 
to social progress encountered by various com- 
munities in greater or less degree. First may 
be mentioned a bad climate and a lack of 
natural advantages, not because these are first 
in importance, but because they are most obvi- 
ous, and they are only to a very moderate extent 
traceable to man's agency. Something can be 
done by the planting of trees, by irrigation, and 
in other ways to modify an unfavorable climate, 
and much may be done to overcome its effects 
upon human beings and animals ; but an abso- 
lute lack of the materials of industry can be 
overcome only by enlarging the environment 
to include regions more favored. 

A despotic, or a corrupt, or an inefficient gov- 
ernment may do more to retard progress than 
an unfavorable climate, or poverty of resources. 
Of the three species of bad government, it is 



OBSTACLES TO SOCIAL PROGRESS 367 

difficult to decide which is the most obnoxious. 
A despotic government destroys individual ini- 
tiative and self-reliance ; a corrupt government 
saps confidence and undermines the virtues 
upon which social progress depends ; an inef- 
ficient government withholds the cooperation 
upon which citizens have a right to rely. None 
of them accomplishes the legitimate industrial 
end of government in acting as a channel 
through which citizens may freely and effec- 
tively unite for those mutual services which 
are better accomplished in cooperation than in 
isolation. A government which is strong, pure, 
and free, is not a ** necessary evil," but an excel- 
lent means of securing worthy ends. When 
it becomes deficient in any of these essential 
respects it becomes in so far an obstacle. 

Intemperance and immorality of every other 
kind are socially dangerous. They are an 
obstacle to the efficient making of goods, for 
this requires a steady hand and clear brain. 
They are an obstacle to the right use of goods, 
for this demands personal character of the best 
type. They totally prevent the wisest choice of 
goods, and so stand as obstacles in each of the 



368 ECONOMICS 

three ways of possible advancement. Strong 
drink may not be responsible for so large a 
part of poverty as is sometimes represented in 
" hysterical " statistics, but it is nevertheless 
one of the chief obstacles to social progress ; 
and by its side must be put over-indulgence in 
rich food and in personal adornment and house- 
hold furniture that are discordant, extravagant, 
and in bad taste. This whole group of obstacles 
may be described as the wilful substitution of 
lower for higher pleasures. Vice and folly 
account, not only for personal ruin, but for social 
stagnation. 

An applicant for appointment in a benevolent 
society was recently asked to name in a word 
the most important cause of pauperism. He 
replied without hesitation, "relief -giving." The 
questioner, a high authority on the subject, 
accepted the reply as correct. Indiscriminate 
giving is an obstacle to social progress. It 
creates paupers and subjects to temptation 
many who are entirely competent to make their 
own living. It transforms many of those who 
might add to the social wealth into social para- 
sites living on the wealth created by others. 



OBSTACLES TO SOCIAL PROGRESS 369 

The withdrawal of indiscriminate pubHc rehef 
has generally been followed by a diminution of 
poverty and a general improvement of the con- 
dition of society. Social progress demands not 
less of fraternal helpfulness, but less encourage- 
ment to mendicancy, and less carelessness con- 
cerning the ultimate effects of alms. 

War, civil and foreign, has been one of the 
great destroyers of commerce and industry. It 
has absorbed energies which might have made 
for social progress. It has developed anti- 
social habits and instincts. It has taken the 
lives of the best workers and has saddled upon 
nations intolerable burdens of debt. There 
have been many compensations. War has at 
times been a civilizer and a useful school for 
peoples who were having too little domestic and 
foreign social contact. But under present con- 
ditions such contact is secured by commerce 
and peaceful intercourse. War and preparations 
for war are obstacles to the inter-exchange of 
goods and of ideas among the nations of the 
earth, and upon such changes, progress is most 
closely dependent. The cost of enormous mili- 
tary armaments must be reckoned among those 



3/0 ECONOMICS 

obstacles to social progress which might be re- 
moved. 

Overcrowding of population in the cities and 
an unduly wide scattering of population in 
newly settled communities are both unfavorable 
conditions. In the overcrowded tenement houses 
it is impossible to furnish a healthful environ- 
ment for children ; it is difficult to satisfy the 
ordinary bodily demands for breathing-space and 
light ; and it is unreasonable to expect other 
than unfavorable effects from the strain imposed 
by constant living in the very midst of a densely 
packed throng. Good work and, still more, 
proper enjoyment of the results of work, require 
hours of relaxation and quiet. These are ob- 
tained by the isolated pioneer, but at the ex- 
pense of that social contact which is likewise 
essential to human progress. Farm life in 
America has this drawback in a peculiar degree, 
because each family, as a rule, lives on its own 
farm instead of in villages as in European 
countries. An American farmer travelHng by 
rail through the most populous provinces of 
Germany will be surprised at the comparatively 
deserted appearance of the country. He does 



OBSTACLES TO SOCIAL PROGRESS 37 1 

not see farmhouses scattered here and there, as 
at home, with a grove of trees about each. The 
houses are grouped in an almost continuous line 
of villages along a well-built road, and the trees 
are in forests planted and guarded by the State. 
The disadvantages of the American system 
become more apparent as communities emerge 
from the pioneer stage and begin to attach more 
importance to social intercourse. Many re- 
formers are beginning to see the importance of 
adding to the interest, variety, and attractiveness 
of American farm life. Anything which will 
accomplish this will relieve the difficulties both 
of oversparseness and of overcrowding. 

One of the surest indications of satisfactory 
progress is the absence of too heavy physical 
labor by women and children. The invention 
of machinery, while it is in itself a blessing, has 
sometimes proved almost a curse by increasing 
the opportunities for child labor. This is one 
of the subjects upon which there are few advo- 
cates of a laissez-faire policy. All are agreed 
that parents ought not to be permitted to sacri- 
fice the mental and physical development of 
their children by putting them at heavy or long- 



3/2 ECONOMICS 

continued work as soon as it would be possible 
for them to earn wages.^ Aside from the bad 
effect upon physical growth it is short-sighted 
and wasteful from the social standpoint. This 
is the time for education, and the education 
should be as nearly as possible to the whole 
mind and body. The experiences of the race 
should be passed on unbrokenly, and up to a 
certain point these experiences can be imparted 
to all the children of men. Laws prohibiting 
child labor and requiring attendance at school, 
or other suitable provision for youthful training, 
are therefore in the interests of progress. 

Woman labor on the farm or in the factory 

1 In the large stamping works and canning factories in a city 
like Chicago, not a day passes but some child is made a help- 
less cripple. These accidents occur after three o'clock in the 
afternoon. The child that has begun his work in the morning 
with a reasonable degree of vigor, after working under constant 
pressure for several hours, at about three o'clock becomes so 
wearied, beyond the point of recovery, that he can no longer 
direct the tired fingers and aching arms with any degree of ac- 
curacy. He thus becomes the prey of the great cutting knives, 
or of the jaws of the tin-stamping machine. Proper factory 
legislation would prevent young children from working so many 
hours as to become wearied to the point of danger. — Professor 
William O. Krohn before the National Conference of Charities 
and Correction, 1897. 



OBSTACLES TO SOCIAL PROGRESS 373 

may prove socially disadvantageous, but it cannot 
well be forbidden or closely regulated. Any at- 
tempt to do that would bring greater injury 
than relief. The opening of new occupations, 
rather than the closing of old ones, is the true 
path to progress. The necessity of breaking 
up or neglecting the home in order that women 
may earn wages in the heavier manual occupa- 
tions is nevertheless always to be deplored. 
Social progress is not accelerated, but retarded, 
by any such interference with normal family 
life. 

An improper diet must be given a prominent 
place among the obstacles to social progress. 
Food that is not nutritious, that is improperly 
cooked, that does not contain the food elements 
in a well-balanced proportion, that is not suited 
to the climate, or that is unduly expensive, is 
far more common than that which combines 
the qualities of a good diet. We need not go 
so far as to ascribe the poverty of Ireland to the 
potato, or that of India to rice, for diet is but 
one element of the standard of living ; and many 
causes may unite to bring a people to a condi- 
tion in which a cheap article of diet will alone 



374 ECONOMICS 

prevent famine. But changes in diet come 
very near the beginning of progress, marking 
the line between primitive and progressive com- 
munities. And in the most advanced stages, a 
nation finds one of its chief sources of strength 
or weakness in the character of its diet. If it 
is inexpensive, varied, and nutritious ; if its 
various items contain the food elements in the 
proportions in which the body can use them ; 
and if, finally, it is of a character that makes 
the best use of the available natural resources, 
— then it is an economical diet and a source of 
social prosperity. The obstacle to social prog- 
ress which is here emphasized is not so much 
the absence of the materials for a proper diet, 
as the absence of skill in cooking and in buying 
provisions that prevents poorer families, and also 
the families of larger means who rely upon 
ignorant cooks, from getting what they might 
from the food within reach. 



CHAPTER XVII 

DISPOSITION OF THE SOCIAL SURPLUS 

The entire product of industry is distributed 
among those who have helped in the production, 
or have otherwise established a recognized claim 
to a share in it. Every producer receives a mini- 
mum share sufficient to cover actual costs, and if 
in a favorable economic position, a share also in 
the surplus. This surplus arises from the in- 
creased efficiency of labor, the invention of 
machinery, the discovery of natural resources, 
the accumulation of capital, the development of 
new kinds of human ability, the substitution of 
a more economical diet, a removal to more favor- 
able environment, and the various other ways of 
reducing costs and increasing utilities. There 
is a surplus as soon as industry provides more 
than enough to replace all costs, giving to each 
producer the amount of his investments, includ- 
ing the cost of subsistence during production. 
Even in an undeveloped state of industry, nature 
375 



3/6 ECONOMICS 

may be so liberal that there is a surplus in agri- 
culture or in mining. The commercial nations 
secure a surplus by carrying products to places 
where they have greater value ; and the improve- 
ment of the industrial organization, by introdu- 
cing the division of labor, machinery, and superior 
management, gives a greater surplus still. While 
these changes are in progress there are also so- 
cial changes which enable people to do equal 
work with less loss of vitality, and, on the other 
hand, to obtain greater enjoyment from equal 
quantities of goods. The surplus is increased 
as much by these social changes as by the ma- 
terial changes which directly affect the making 
of goods. 

One who turns his attention to the subject of 
economics, as soon as he understands its scope, 
naturally asks himself two questions : Where do 
goods come from ? What becomes of them ? 
In answering the first question we soon learn 
they do not come as a rule from the labor of the 
person who has possession of them, or, at least, 
not exclusively from his labor. Hundreds of 
laborers, many of them skilled mechanics, others 
inventors, others travellers, still others farmers. 



DISPOSITION OF THE SOCIAL SURPLUS ^JJ 

miners, and merchants, have cooperated to make 
the goods in question. It may be that the one 
who now has them has performed labor which 
is an equivalent for all of this labor previously 
expended by others, so far as there are any liv- 
ing claimants for an equivalent ; but nature has 
also contributed, permanent improvements made 
by past ages have been utilized, inventions for 
which the patent has long since expired, and 
methods of work suggested by the bright minds 
of previous generations, have since become the 
common property of mankind. So the answer 
to the question where goods come from is not 
so simple as it appears. It is found only in a 
full study of the whole field of economics. One 
of the first things learned about it is that for 
many items in their present utility you cannot 
find any person who can claim to have incurred 
a corresponding cost, and therefore that society 
has on its hands a surplus to be distributed 
otherwise than in accordance with the law of 
costs. 

The answer to the second question : What 
becomes of the goods produced by society 1 
will bring this out still more clearly. In fact, 



378 ECONOMICS 

goods are distributed in two quite distinct ways. 
If the entire product of industry were exactly 
large enough to replace actual costs, the distribu- 
tion of wealth would be a simple matter. Each 
producer would receive from the product suffi- 
cient to cover his costs ; the laborers and man- 
ager enough to purchase the food and shelter 
absolutely needed to keep themselves in work- 
ing condition, capitalists enough to maintain 
their capital, landowners enough to replace the 
losses from cultivation. Such minimum shares 
are a condition of the continuance of indus- 
try. As a rule we use the word wages to des- 
ignate the income of laborers, interest that 
of capitalists, and rent that of landlords. But 
where there are only minimum shares, as 
above described, there is no interest, for this 
includes only the return obtained for the use 
of capital, and of course there is no interest 
unless the capitalists receive something more 
than the amount which they have invested. 
Similarly, there is no rent under such circum- 
stances, for there is no income deserving this 
name until the landlords secure from the mere 
possession of land more than enough to cover 



DISPOSITION OF THE SOCIAL SURPLUS 379 

the expenses of keeping it in cultivation. In a 
state of slavery, even wages are absent, and we 
may therefore readily imagine industries which 
only replace costs, giving to each class of pro- 
ducers a minimum share sufficient for that pur- 
pose, but not sufficient to afford any surplus. 

The substitution of free labor for slavery 
makes necessary the payment of wages even 
where there is no surplus, but the mere fact that 
the wage system is adopted is no indication that 
laborers are receiving more than the minimum 
share essential to the continuance of a laboring 
population. Both rent and interest, however, 
are an indication of a social surplus. Capital 
may always be so utilized as to enable society 
to realize a surplus. The very appearance of 
capital is proof that labor is more wisely directed 
and is turning into more efficient channels. 
Rent arises from the cultivation of land of dif- 
ferent degrees of productiveness. Costs are 
covered and the minimum shares obtained on 
the poorest land cultivated and the rent on each 
better grade measures the differences between 
the yield of that grade and the poorest land, or 
the land at the margin of cultivation. It is 



38o ECONOMICS 

purely a surplus owing its existence and amount 
to the superior productiveness of the better 
grades of land. The total income of capitalists, 
landlords, and laborers is thus made up of two 
parts : one, a minimum share obtained by the 
physical impossibility of contributing to industry 
without it, the other, a share in the surplus 
called respectively surplus wages, interest, and 
rent. 

It might be well if there were a single word 
to represent that part of a laborer's income which 
is in excess of his costs, corresponding to the 
surplus income of capitalists and landlords. 
But even if there were such a word it might be 
impossible to make the distinction in practice. 
Commodities consumed by man serve a double 
purpose in sustaining his vitality and conferring 
pleasure. Those which are consumed only for 
the second purpose often really serve the first 
as well. The transition from necessary wages 
to surplus wages is imperceptible. Some 
laborers might even deny that they ever receive 
surplus wages from a confusion of necessary 
wages with fair or just wages. But it is per- 
fectly natural and just that laborers should share 



DISPOSITION OF THE SOCIAL SURPLUS 38 1 

in the surplus. It is also generally possible for 
them to do so. 

The law of costs is, then, the first part of the 
law of distribution. Every class whose coop- 
eration is required in production will receive 
from the product such a part as will put it in the 
end in as favorable a position as at the begin- 
ning. Every loss of vitality must be covered, 
every personal cost made good. We may, in- 
deed, imagine a temporary state of affairs in 
which costs are not replaced. Through some 
extraordinary pressure, such as that of war or 
religion, a community may permit its capital to 
be sacrificed, its population diminished, and its 
natural resources squandered in some undertak- 
ing which gratifies ambition without securing 
the conditions of future production. But such 
instances are exceptional and aid in proving the 
rule, for the exhaustion of national strength 
that would follow would soon make impossible a 
continuance of these enterprises, and, taking 
into account the rapidity with which material 
wealth is used up when not constantly replaced, 
it seems likely that the law of costs would assert 
itself very quickly. 



382 ECONOMICS 

No person or class of persons is assured of a 
living or of a minirnum share in distribution 
otherwise than by contributing to the social 
wealth the value of a living. The law of costs 
is not a statement that every person who works, 
regardless of the amount and quality of his 
work, will receive a share in the product of in- 
dustry. Humanity or self-protection may prompt 
society to interfere in extreme cases to prevent 
actual starvation, but in that case it is not a 
minimum share in distribution that is awarded, 
it is a gratuitous share of the surplus. What is 
assured by the law of costs is that each class 
will receive in return for its participation in the 
work of society, provided its assistance is effec- 
tive and rightly directed, at least as much as the 
effort has cost. It will probably receive more, 
but certainly, as a rule and in the long run, not 
less. If there is only enough for each necessary 
class of producers to receive so much, none will 
receive more than this minimum share, and 
there is no surplus to divide. 

Generally, however, the sum of the minimum 
shares does not equal the total product. There is 
then a competition among different classes for this 



DISPOSITION OF THE SOCIAL SURPLUS 383 

free portion. Various theories have been put 
forward to account for its disposition, each 
theory suggested by the manner in which the 
disposition of the surplus is made, or is supposed 
to be made, at the time when the theory is formu- 
lated. The mercantilists, whose ideas of national 
policy controlled Europe in the seventeenth and 
eighteenth centuries, looked upon the struggle 
for the surplus as taking place between com- 
munities rather than between individuals. They 
concentrated their energies in each country upon 
the creation of a favorable set of political, social, 
and economic conditions for the trade and indus- 
try of their own people, striving to secure the 
largest possible share in every division of land 
or treasure which fortune opened to them in 
distant regions of the earth, and exacting heavy 
tolls for every commercial privilege granted their 
neighbors. In particular they took strong meas- 
ures against the exportation of gold and silver 
even in exchange for goods, believing that a loss 
of money was an evil of greater moment than 
almost any other against which it was necessary 
to guard. By such means they attempted to 
secure for their own nation the full share in 



384 ECONOMICS 

the surplus wealth to which their strength and 
ingenuity entitled them. Within the community 
the amount received by each class had long 
been regulated chiefly by custom. Each class 
was allowed by the community to live in a 
manner which corresponded with its established 
position. If the general income increased this 
became improved, but it remained fixed in its 
relation to the position of other classes. 

This system was displaced in the latter part 
of the eighteenth century, in France, by the 
economists or physiocrats, who denied any 
peculiar advantage to the possession of money 
or the maintenance of commercial restrictions. 
All net surplus, they taught, comes from 
agriculture. Those who engage in commerce 
and manufactures consume exactly as much as 
they produce. Those who cultivate the soil 
alone produce more than is consumed in culti- 
vation, and the whole community therefore de- 
pends upon its agriculture for its increase of 
wealth. Public burdens should be placed upon 
land, where it must ultimately fall, and all other 
occupations should be left free from both bur- 
dens and restrictions. The cooperation of nat- 



DISPOSITION OF THE SOCIAL SURPLUS 385 

ure was thought by this school of economists 
to be the real source of surplus wealth. The 
modification which they proposed in its disposi- 
tion did not reach so far as a positive distribu- 
tion among different classes. They proposed 
simply that all classes should be put upon an 
equal footing by a removal of the positive regu- 
lations and restrictions imposed in the mercan- 
tilist system and a transfer of public burdens 
to bring them as near as possible to the source 
of all surplus wealth — agricultural produce. 

Adam Smith, whose Wealth of Nations ap- 
peared in 1776, likewise favored a removal of 
restrictions and an introduction of complete 
commercial and industrial freedom. But he 
thought that the surplus came rather from the 
division of labor, by which he meant the whole 
organization of industry. His urgent plea is for 
the abolition of all traces of the mercantile and 
colonial systems, leaving each person free to 
choose his own interest and to establish such 
economic relations with fellow-workers as would 
be to his advantage. Adam Smith is remem- 
bered by people in general chiefly for his attack 
on the mercantilist teachings and on the system 

2C 



386 ECONOMICS 

of protective tariffs, bounties, and restrictions on 
labor, but his work is of interest to students 
of economics, not for those things alone, but 
even more for his complete demonstration of 
the general principle of industrial and commer- 
cial freedom, and for the manner in which the 
operation of self-interest works to the advantage 
of society. The surplus will distribute itself, if 
there is no interference, in such a way as most effi- 
ciently to promote industry and the general good. 
The socialist theory, held by many who desire 
to abolish the present industrial system of wages, 
private property, and private contract, is that the 
surplus, though created by labor, is seized by 
those who control the physical means of produc- 
tion, such as land and capital, and that the labor- 
ers who do not own property may be kept at 
the verge of starvation, with incomes only large 
enough to keep up the necessary supply of labor- 
ers. The law of population, the law of rent, 
and the peculiar explanation of the nature of 
capital worked out by Karl Marx and others, 
constitute an argument for transferring the en- 
tire control of the instruments of production to 
the State. It is claimed that the surplus belongs 



DISPOSITION OF THE SOCIAL SURPLUS 387 

to all and that all should share in its enjoyment. 
'' From each according to his abilities ; to each 
according to his need," is a favorite saying of 
those who hold to this view. 

Still another method of accounting for and 
disposing of the surplus may be mentioned. It 
is held by those who look upon rent as the only 
real surplus, and who propose a single tax on 
land values as the solution of the problem of 
poverty and the condition of social progress. 
All incomes may be reduced to rent, wages, or 
interest. The law of wages, as given by Henry 
George, is that laborers will receive all that their 
labor can produce upon the poorest land which 
it is necessary to cultivate. The law of interest 
is that capital will receive whatever capital adds 
to labor when employed upon the poorest land 
which it is necessary to cultivate. Even on better 
grades of land, capital and labor will obtain only 
these minimum shares, the balance of the product 
going to the owners of the better grades of land 
as rent. It is the landlords alone, therefore, 
who receive a surplus share, and the right way 
of securing this surplus for the community is to 
abolish private property in land, — leaving the 



388 ' ECONOMICS 

owners in possession, but depriving them of all 
advantage from the superior quality of their 
land by taxation. It is thought by advocates 
of the single tax, that the revenue from this 
source v^ould be so large that all other forms 
of taxation could be abolished, and that the sur- 
plus obtained would be sufficient, not only to 
meet the expenses of all activities now under- 
taken by the State, but to enable it to undertake 
vast improvements in the direction of better 
schools, libraries, parks, roads, etc., and even to 
completely abolish poverty and want. 

No one has yet ventured to say that wages 
are the only true surplus, although, as will be 
seen from the preceding paragraphs, this claim 
has been put forward for the returns from nat- 
ure, capital, money, industrial freedom, and 
land. But in his theory of wages, one of the 
most eminent American economists, Francis A. 
Walker, comes near taking this position. In 
his theory of distribution, wages, though they 
do not absorb the entire surplus, are neverthe- 
less the residual share, and it is to wages that 
all the gains are added which spring from 
improvements in the arts or more efficient pro- 



DISPOSITION OF THE SOCIAL SURPLUS 389 

duction, whatever the cause, unless these im- 
provements are of a kind that call in new grades 
of land and so increase rent, increase the demand 
for capital and so raise interest, or enable a 
poorer class of employers to survive and so in- 
crease profits. It is held by Walker that there 
is a definite law of rent, as set forth in the early 
part of this chapter, and a law of profits closely 
corresponding to the law of rent, based on dif- 
ferences in the managing abilities of employers, 
as rent is based on differences in soils. Interest 
is determined, according to Walker's theory of 
distribution, by the supply of and the demand 
for capital, the rate always rising or falling in 
such a way as to maintain an equilibrium between 
them. Thus, there is a law for rent, for profits, 
and for interest, definitely fixing the amount 
that can be claimed by landlords, employers, and 
capitalists. All that remains is wages. Labor- 
ers are the residual claimants, and, if they are 
intelligent and look to their interest, they will 
have no difficulty in securing the chief benefits 
of progress, whether it take the form of improve- 
ments in the arts, social development, or in- 
creased resources. If new lands are discovered. 



390 ECONOMICS 

it is probable that the result will be to reduce 
rents and increase wages. If capital is increased, 
interest will fall and wages rise. If employers 
of a higher grade replace those who are incom- 
petent, the total amount of profits will be less 
rather than greater, and wages will absorb what 
is thus set free. The laborers are, therefore, in 
a favorable economic position, whatever the char- 
acter of the improvement ; and although they do 
not obtain the whole surplus, they secure by far 
the larger part. 

The student may find himself by this time 
sadly puzzled to know what is the real truth of 
the matter. If the opinions of those who have 
studied industrial conditions closely differ so 
widely, is there any way of finding out what 
does become of the goods produced by society ; 
whether capitalists, landlords, employers, or 
laborers get the surplus ; or whether all share 
in it ; and, if the latter, whether there is any 
way of telling which shares of the surplus will 
be liberal and which ones will be small ? 

The truth seems to be that the surplus is dis- 
tributed with as great regularity, and as strictly 
in accordance with law as are the minimum 



DISPOSITION OF THE SOCIAL SURPLUS 39 1 

shares ; but that it is not always the same class 
that holds the favored position. At one time 
capital, at another land, at another managing 
ability, and at another labor, may be able to se- 
cure for itself the free surplus. At any given 
time that one of the factors, necessary in pro- 
duction, which is increasing at the slowest rate, 
will be able to secure the benefits of the im- 
provements in production and to reduce the 
shares of the other factor as nearly as possible 
to the minimum fixed by the laws of cost.^ It 
is this share also which must bear the perma- 
nent burdens of society.^ At the time of the 
Napoleonic wars, the price of food rose, agricul- 
tural products increased in value, there was a 
strong demand for land, and rent became in Eng- 
land the share which most attracted attention. 
The supply of land could not keep pace with the 
demand for food ; cultivation was pushed down 
to poorer lands, and the income from other 
sources than land was very much reduced. 
Under those circumstances, rent was the share 
which took the surplus, because land was the 

1 Patten, The Stability of Prices, p. 31. 

2 Ibid. 



392 ECONOMICS 

factor in production most urgently in demand, 
and it was land which eventually bore the per- 
manent burdens. 

In a later period the industrial revolution and 
the changes in demand created an altogether 
new place for capital. The opening up of new 
countries, and the improvements in transporta- 
tion, made land more plentiful, but capital was 
lacking to take advantage of the new opportuni- 
ties. The land could be had for little, because 
its owners were competing with each other for 
the capital necessary to develop it. Wages 
were low because the new industrial processes 
had lessened the demand for labor in particular 
industries, and because in England a vicious 
system of poor relief reduced the general stand- 
ing of living and unduly stimulated the growth 
of population. The most slowly increasing fac- 
tor was capital, or rather capital and managing 
ability combined, for they were not yet easily 
separated, as became possible afterwards with 
the extension of credit. Profits (including in- 
terest) were, therefore, the share which increased 
so enormously as to excite the apprehension of 
socialists, trade-unions, and cooperative leaders. 



DISPOSITION OF THE SOCIAL SURPLUS 393 

It was thought that the interests of capital and 
labor were in direct conflict, no account being 
taken of rent. The possession of capital was 
seen to be the means by which the largest share 
in the surplus of society was secured, and it 
brought as its penalty the necessity of providing 
for the burdens of society. If, for example, a 
poll-tax was levied on laborers, it was thought 
that it would be shifted to capitalists, since 
laborers only received sufficient for maintenance, 
and they could pay the tax only by securing a 
corresponding increase of wages. 

We have been passing through a period in 
America in which not land, nor labor, nor capi- 
tal was the most slowly increasing factor, but 
rather managing ability. The opportunities for 
developing new industries and the supply of all 
the essential physical factors have been present 
in greater abundance than the organizing skill 
and enterprise required to make them really 
productive. The lack has not been greater than 
in other countries, but has only been relatively 
noticeable in comparison with the supply of 
other factors. Profits in the narrower sense, 
independent of interest, as a return for superior 



394 



ECONOMICS 



management, have been large because the men 
who have the quahties displayed by the cap- 
tains of industry have been rare, and those who 
have appeared have been able to secure the 
other requisite factors on easy terms. Monop- 
olies have arisen under these conditions, and 
the taxation of monopolies has been a source 
from which communities have been able to se- 
cure a large part of their revenues, though not 
so much has been made of this opportunity as 
might have been. Permanent burdens have 
rested in this instance, as in the earlier ones, 
upon the factor which was able to secure the 
largest part of the surplus. 

The nearest rival for the lion's share of the 
surplus product has been, not capital, nor land, 
but labor. The fall in the price of food indicates 
a rise rather than a fall in the margin of cultiva- 
tion. The differences in the qualities of soils 
have become less rather than greater. Rent has 
diminished rather than increased, except in the 
special instances of ground rents, of terminal 
facilities, and of favored building spots which 
follow the law of profits rather than that of rent. 
The rate of interest, after eliminating the ele- 



DISPOSITION OF THE SOCIAL SURPLUS 395 

ment of risk, has considerably fallen. Capital 
is saved for a much smaller reward than formerly. 
The appreciation of future wants has become 
more general. Neither rent, nor interest, have 
been increasing their portion of the surplus, 
though it is from the surplus that both are drawn 
in the first instance. In the competition be- 
tween employers and laborers for the surplus 
product, the present tendencies seem to favor 
wages and not profits. It is true that there is a 
large class of unemployed, and that in excep- 
tional cases it is still possible to make extraor- 
dinary profits. But the number of employers 
who are capable of organizing some special in- 
dustry profitably is increasing. This works to 
the advantage even of the unemployed, for one 
reason of their lack of employment is the absence 
of men of this kind. If there are enough ef- 
fective managers to utilize all the good oppor- 
tunities for industrial activity, it will go far 
toward giving employment to all. Increased 
steadiness of demand enables an employer of 
even moderate ability to keep his establishment 
in operation. Demand for new commodities 
calls for abilities of a kind not already in use. 



396 ECONOMICS 

New discoveries make possible the establishment 
of an industry in a new place, on a more eco- 
nomical basis, or with a different kind of motive 
power. The development of new qualities in 
the laborers permits the introduction of an in- 
dustry from a foreign country. Many similar 
tendencies are at work, the effect of which is to 
increase the rate at which employing and man- 
aging ability is supplied, and so to reduce the 
rewards of the few who have supplied it. It 
would seem that in the near future, effective 
labor is more likely to be the limiting factor than 
any other. If it should be true that land, capi- 
tal, and directive intelligence are all supplied at 
a more rapid rate than efficient labor, then we 
may expect to see wages remain, as it has to 
some extent already seemed to be, the residual 
claimant on the industrial product, the natural 
heir to all the improvements that come from 
industrial and social progress. To maintain 
such a position there must exist a high standard 
of living and a series of social institutions which 
prevent an undue pressure of population, and se- 
cure adequate hours of recreation and the main- 
tenance of a high type of family and social life. 



INDEX 



Absolute utility, 8i, 82, 97, 98, 

123. 
Abstinence, 309, 312. 
Accounts, book, 246-8; bank, 

249-52- 

Adams, H. C, 330. 

Agricultural chemistry, 38, 39. 

American Academy of Political 
and Social Science, 2, 89, 
123. 

American Economic Associa- 
tion, 265. 

American Encyclopaedia, 38. 

American Institute of Educa- 
tion, 322. 

Andrews, 264, 265. 

Annals of the American Acad- 
emy, 89, 123. 

Appetites, changes in, 95-7, 
150. 

Atwater, 38, 71. 

Balance of trade, 235-8, 254. 

Bank accounts, 249-52; bank- 
ing, etc., see the organization 
of credit; notes, 257-60. 

Barter, 187-93, 214. 

Bills of exchange, 235-6, 254- 

255- 
Book accounts, 246-8. 



Cairnes, 80. 

Capital, 265-77, 292, 309-16, 
360, 392-3; active, 265; cir- 
culating, 268-70; money as, 
275-7; 340-1 ; fixed, 268-70, 
340-1; and its earnings, 
Clark, 265; increase of, 121, 
139-40; industry limited by, 
339; passive, 264; saving as 
source of, 271-5, 362-3; 
specialized, 270-1. 

Charity, 4. 

Checks, bank, 249-53, 260. 

Children, vs'orkers in prepara- 
tion, 7. 

Child labor, 371-2. 

Church, The, 51. 

Circulating capital, 268-70; 
money as, 275-7. 

Civic relations, compared with 
economic, 5. 

Clark, 113, 158, 263, 264. . 

Clearing-house, 252-3. 

Climate, 28-33, 3^6. 

Coinage, 219-21, 242; silver, 
225. 

Commerce, see distribution of 
products. 

Commodity defined, 77. 

Communists, 14. 



397 



398 



INDEX 



Complementary goods, 99-100. 
Complements, 121, 147; utility 

of, 99-104, 128-9, 151- 
Configuration, geographical, 

40-2. 
Consumers, cooperation of, 121, 

125-7- 

Consumption, 79; defined, 77; 
economic order of, 85, 93-8, 
109, 146, 149-50; economies 
of, 130, 131; harmonyin,97- 
100; increase in variety of, 
97-8, 1 21-3, 151; margin of, 
107-11, 167; limitations of, 
73-5 ; normal and primitive, 
lOO; the consumption of 
goods, 73-92; the con- 
sumption of vi^ealth. Patten, 
94; propositions concerning 
consumption, 93-111; pro- 
ductive, 78; social, 117; so- 
cializing of, 121, 123-5, 127; 
the starting point, 91; and 
taxation, 94; test of, 77-8. 

Cooperation, of consumers, 121, 
125-7; industrial, 321-2. 

Cost, 155; changes in relative, 
93-4, 146-8; consumers', 154, 
155, 156, 160,165; law of, in 
distribution, 381-2; subjec- 
tive, 80; and utility, 115, 
133-4; and value, 154-6, 

333-7- 

Costs, social, 117; and surplus, 
112, 114; see disposition of 
social surplus. 

Credit, 56-7, 197-8; inter- 
national, 216, 254; the or- 
ganization of credit, 239-60. 



Crops, rotation of, 308-9. 
Cultivation, margin of, 349, 

350; of plants, 71. 
Cunningham, 244. 
Currency, excess of, 229-32; 

paper, 216, 257-60. 

Debtors, social, 4-14. 
Decimal system, 221. 
Demand, for commodities, not 

a demand for labor, 340. 
Dependents, compared v^^ith 

economic men, 4-14. 
Diet, 373. 
Diminishing returns, law of, 

346-7, 357-60. 
Diminishing utiUty, 85-9, 160-9. 
Disposition of the social sur- 
plus, 375-97- 
Distribution, 14; as determined 

by a law of rent, 113; of 

money, international, 231-3; 

of products, the, 178-210; 

of wealth, see disposition of 

the social surplus. 
Diversification of industry, 297. 
Division of labor, 121, 134-8, 

182-5, 203, 294-5, 298, 317* 

323-7, 385- 
Draft, 253. 
Dynamic economics. Patten, 

82, 92, 115, 148. 

Earth, the, and man, Guyot, 
26; as modified by human 
action, Marsh, 28. 

Economic, environment, the, 
16-44, 73; function of wom- 
an, 2; ideal, ii; man, the, 



INDEX 



399 



1-15; order of consumption, 

85. 93-8. I09» 146, 149-50; 
progress, goal of, 62 ; society, 
social condition of, 10, 45-59. 

Economics defined, i. 

Economics, Hadley, 260. 

Economies of consmnption, 

130, 131- 
Education, 51-2, 121, 140, 
152-3, 207, 286-7, 289-92, 

372- 
Effective utility, 154, 158, 165. 
Energy, physical, 18-24, 262, 

277-80. 
England, bank of, 243. 
Environment, 107-10; capacity 

of, 84; creation of a new, 63, 

68-71 ; the economic, 16-44; 

and welfare, 73. 
Equals, economic, 9, ii. 
Exchange, see distribution of 

products, the; bills of, 235-6, 

254-5- 

Expenses of production, and 
profits, 352-4; and rent, 
350-2; and value, 333-7. 

Extractive industries, 72. 

Factory system, the, 199-200. 

Fairs, 202. 

Familiar principles, restatement 

of, 323-55- 
Family, the, 48-50, 125-6, 211. 
Fawcett, 284. 

Final increments, 104-7, ^^^6. 
Final utility and value, 162-77. 
Fixed capital, 268-70, 340-1. 
Food supply, of the future, 

Atwater, 71 ; irregularity of, 



95; and standard of living, 

145- 

Force, muscular, 23. 

Forces of nature, 18, 24; locali- 
zation of, 63-5; periodic 
action of, 63-4; serial action, 

65-7- 

P^orests, 306-8; effect on cli- 
mate, 30. 

Form, permanence of, 67-8. 

Freedom of trade, 327-30. 

Fundamental idea of capital, 
Patten, 263. 

Future goods, 262-77, 3^^- 

Gaye, 30. 

Geographical configuration, 
40-2; differences, 26. 

George, Henry, 387. 

Gibbons, 202, 222. 

Gide, 272, 279, 284. 

Giving, indiscriminate, 368. 

Gold, 43, 195, 215, 217-19, 222. 

Goldsmiths, 244. 

V. d. Goltz, 38. 

Good, defined, 60. 

Goods, complementary, 99-100; 
the consumption of, 73-92; 
defined, 77; free, 60; future, 
262-77, 310J the making of, 
60-72, 179; the ownership 
of, 90; present, 263, 310, 
312-5; sources of, i; value 
of intermediate, 310. 

Government, 366-7. 

Gravitation, 22-3. 

Great world's farm, the, Gaye, 
30- 

Gregory, 83. 



400 



INDEX 



Gresham's law, 229. 

Group, discordant, loi; natu- 
ral, 100; utility of, 99-104, 
128-9, 151- 

Guyot, 26. 

Hadley, 260. 

Harmony in consumption, 97, 

100, 
Heat, 20-1. 
Heredity, 49. 
History of commerce in Europe, 

the, Gibbons, 202, 222. 

Immorality, 367-8. 

Imputation of utility, 102-4, 147, 
149. 

Income, 143, 148, 15 1-3, 380; 
increased by saving, 274-5. 

Increments, final, 104-7, ^^^5 
initial, 105; marginal, 104, 
iio-ii; succession of, 85, 
104, 108. 

Indirect utility, 8^. 

Industrial cooperation, 321-2; 
progress, iii, 140-2, 167, 
321 ; qualities, transmission 
of, 121, 140; society, 178. 

Industry, diversification of, 297 ; 
efficiency of, 317-19; limited 
by capital, 339; organization 
of, 121, 137-8, 261-99, 317, 
385; proposition concerning, 
300-22. 

Inheritance, 318. 

Initial increments, 105; utility, 
161, 163, 166, 170, 197. 

Institutes of economics, An- 
drew's, 264. 



Institutions, social, 45. 

Intelligence, 262, 287-92,363-4. 

Intemperance, 367-8. 

Interest, 255-7, 276, 312; see 
disposition of the social sur- 
plus; and profits, 342. 

Intermediate goods, value of, 
310. 

International credit, 216, 254; 
distribution of money, 231-3. 

Interpretation of nature, Sha- 
ler, 21. 

Invention, 121, 140, 325. 

Iron, 42. 

Irregularity of food supply, 95. 

Isotherms, 31. 

James, 322. 

Knov^'ledge, diffusion of, 320-2. 
Krohn, 372. 

Light, 21. 

Living, the standard of, 143-53. 

Localization of industry, 294, 

295-6; of natural forces, 63, 

64-5- 

Land, 121, 139-40, 277-80, 292, 
300-9, 346-52, 391-2; pri- 
vate property in, 388. 

Law of progress, iio-ii. 

Legal tender, 226-9. 

Labor, 23, 280-7, 292, 365, 
394-7; division of, 1 2 1, 134-8, 
182-5, 203, 294-5, 298, 317 
323-7, 385; organization of, 

329- 
Luxuries, 143, 146, 148; in xvi. 
Cent., 199. 



INDEX 



401 



Machinery, effect on labor, 
284-5. 

Malthus, 345. 

Man, the economic, 1-15; and 
environment, 107-10. 

Margin of consumption, 107-1 1, 
167; of cultivation, 349,350. 

Marginal increments, 104, iio- 
II. 

Marginal utility, 162-77, 189, 
196, 211; of money, 223. 

Market, 201-10, 211, 337-8. 

Market value, 13, 14, 169-77. 

Marshall, 91, 96, 296. 

Marsh, George P., 28. 

Marx, Karl, 386. 

Medium of exchange, money 
as, 234; see money, and dis- 
tribution of products. 

Mercantilists, 383-4. 

Mill, 269, 272, 284, 298, 315, 

339- 

Mineral resources, 42-3. 

Money, 195, 211-38; see or- 
ganization of credit, 239-60; 
as circulating capital, 275-7, 
340-1 ; international distri- 
bution of, 231-3; marginal 
utility of, 223; mercantilists' 
theory, 383-4; representative, 
216, 224-6. 

Moral qualities, 121, 140. 

Muscular force, 23. 



National conference of chari- 
ties and correction, 372. 
Nature, forces of, 18, 24. 
Necessaries, 146, 148. 



Negative utilities, 81, 82, 97-8, 

lOI. 

Neutral utility, 82, 98. 

New resources, utilization of, 

129-31. 
Nitrogen, as plant food, 39. 
Normal consumption, 100. 
North America, climate of, 31; 

geographical configuration 

of, 40-2. 

Obstacles to social progress, 

356-74- 
Ocean currents and climate, 

30. 
Order of consumption, eco- 
nomic, 85, 93-8, 109, 146, 

149-50; natural, 85. 
Organization of credit, the, 

239-60. 
Organization of industry, the, 

121,137-8,261-99,317,385; 

of labor, 329. 
Organization, social, 57-8. 
Overcrowding, 370-1. 

Pain, in production, 80, 1 18; 

defined, 80. 
Paper currency, 216, 257-60. 
Partnership, 255. 
Passive capital, 264. 
Patten, vi, 63, 82, 92, 94, 115, 

148, 263, 265, 391. 
Periodic action of natural forces, 

63-4- 
Permanence of form, 67-8. 
Philosophy of wealth, Clark, 

158, 263. 



402 



INDEX 



Physical energy, 18-24, 262, 
277-80. 

Physical science, and econom- 
ics, 16. 

Physiocrats, 355, 384-5. 

Plant food, 38; nitrogen as, 

39- 

Plants, cultivation of, 71. 

Pleasure from complementary 
goods, 99-100. 

Political economy, Gregory, S^. 

Population, 121, 140, 303-4; 
and means of subsistence, 
344-6. 

Positive utilities, substitution of, 
121, 123, 147. 

Positive utility, 79, 81, 82, 97-8, 
loi, 159. 

Present goods, 263, 310, 312-5. 

Price, 229-38, 337-8. 

Primitive consumption, 100. 

Principles of economics, Mar- 
shall, 91, 296. 

Principles of political economy, 
Mill, 269, 284, 298; Gide, 
272, 279. 

Principles, restatement of famil- 
iar, 323-55- 

Private property, 361; in land, 

388. 
Produce, distinguished from 

products, 263. 
Production, 78, 79; expenses 

of, and profits, 352-4; and 

rent, 350-2. 
Productiveness, test of, 354-5. 
Products, the distribution of, 

178-210; unfinished, 262-77. 
Profits, 341-3, 393-4; and ex- 



penses of production, 352-4; 
see disposition of social sur- 
plus. 

Progress, defined, 356; goal of 
economic, 62; law of, iio- 
II; industrial, ill, 140-2, 
167, 321; obstacles to social, 
356-74; social, iio-ii, 
140-2, 167. 

Promissory notes, 255-7. 

Property, 11, 53-4; private, 
361 ; in land, 388. 

Propositions concerning con- 
sumption, 93-1 1 1. 

Propositions concerning indus- 
try, 300-22. 

Prosperity, social, 1 12-142. 

Quarterly Journal of Economics, 
263. 

Relation of State to industry, 
the, Adams, 330. 

Religion, 50-1. 

Rent, 303, 347-52; and ex- 
penses of production, 350-2; 
see disposition of the social 
surplus. 

Representative money, 216, 
224-6. 

Representative value, 194. 

Residual share, wages as, 388- 
90, 396. 

Resources, mineral, 42-3 ; utili- 
zation of new, 129-31. 

Restatement of familiar princi- 
ples, 323-55. 

Returns, law of diminishing, 
346-7. 357-60. 



INDEX 



403 



Roman empire, physical basis 

of, 28. 
Rotation of crops, 308-9. 

Saving, as source of capital, 

271-5, 362-3. 
Scale of diminishing utilities, 

86-9, 106, 108, 117. 
Schonberg's Handbuch, 38. 
Security, lack of, an obstacle 

to social progress, 360-2. 
Serial action of natural forces, 

65-7- 

Shaler, 21. 

Silver, 43, 215, 217-19; coin- 
age of, 225, 

Single tax, 387-8. 

Smart, 89, 123. 

Smith, Adam, 323, 355, 385-6. 

Social conditions of an eco- 
nomic society, the, 10, 45-59. 

Social consumption, 117. 

Social costs, 117. 

Social institutions, 45. 

Social organization, 57-8. 

Social progress, iio-ii, 140-2, 
167; defined, 356; obstacles 
to, 356-74. 

Social prosperity, 112-42. 

Social surplus, 115, 355; dispo- 
sition of the, 375-97. 

Social value, 169-77. 

Socialists, 14, 386-7. 

Socializing of consumption, 121, 
123-5, 127. 

Society, industrial, 178. 

Soil, fertility of, and rent, 347-9 ; 
origin and composition of, 
33-9. 302-3. 



Specialized capital, 270-1. 
Stability of prices, Patten, 391. 
Standard of living, the, 143-53, 

208-10; defined, 143; and 

income, 143. 
Standard of value, 192-5; see 

money. 
State, the, 52-3. 
Steam, 199. 
Subjective cost, 80. 
Subsistence, expense of, and 

Visages, 343-4; and popula- 
tion, 344-6. 
Substitution of positive utilities, 

121, 123, 147. 
Supply, 169, 172-7. 
Surplus, 114; utility, 112; social, 

^^Si 355 J disposition of, 

375-97. 

Taxation, 54-6; and consump- 
tion, 94. 

Teachers, economic services of, 
52. 

Temperate zone, 31. 

Territorial division of labor, 
121, 136-7, 294. 

Theory of social forces, the, 
Patten, 63. 

Trade, balance of, 235-8, 254; 
freedom of, 327-30. 

Transportation, 121, 138-9, 
198-200, 303-4. 

Unfinished products, 262-77. 

Unit of value, 191-2. 

Utilities, creation of, 77; de- 
struction of, 78; discordant, 
IOO-2; social, 1 16; increase 



404 



INDEX 



of, 121; defined, 77; dimin- 
ishing, 85-9, 160-9; effective, 
154, 158, 165; final, and value, 
162-77 ; imputed, 102-4, I47> 
149; indirect, 83; initial, 161, 
163, 166, 170, 197; marginal, 
162-77, 189, 196, 211; nega- 
tive, 81, 82, 97-8, loi; neu- 
tral, 82, 98; positive, 79, 81, 
82, 97-8, loi, 159; substitu- 
tion of positive, 121, 123, 
147; and welfare, 168. 
Utility, 77, 154; absolute, 81, 
82, 97, 98, 123; of comple- 
ment, 99-104, 128-9, 151; 
and consumption, 89; and 
cost, 115, 133-4; surplus, 
112; and value, 89, 90. 



Value, 13, i54-77> ^H 211, 
267; and cost, 154-6,333-7; 
defined, 154; and expenses 
of production, 333-7; of in- 
termediate goods, 310; mar- 
ket, 13, 14, 169-77; of money, 
230-8; representative of, 194; 
social, 169-77; standard of. 



192-5, see money; unit of, 
1 9 1-2; and utility, 89, 90; 
and welfare, 168. 

Variety of consumption, in- 
crease in, 97-8, 121-3, 151. 

Vegetable mould, 37. 

Venice, bank of, 240. 

Wages, 143, 144, 343-4; see 

disposition of social surplus; 

as residual share, 388-90, 

396. 
Walker, 352, 388, 389. 
Wants, described, 2-3, 91, 109, 

iio-ii, 208, 300-1. 
War, 369. 
Waste, 78-9. 
Water, in the making of soil, 

35- 

Wealth, defined, i, 79, 212, 
213; distribution of, see dis- 
position of the social sur- 
plus. 

Wealth of nations. Smith, 323, 
385-6. 

Welfare, economic environment 
and, 73; and value, 168. 

Wells, David, 323. 



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